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How does high inflation affect a large retailer with a high level of inventory on display and low rate of inventory turnover?
Sir I don’t understand the inventory turnover concept……… Could you explain this question to me please?
High inventory turnover means that you have to reorder frequently because inventory sells quickly. Low turnover means that inventory sells slowly.
So, this company has a lot of inventory whichmsits around for a long time before being sold. That means that it will be purchased relatively cheaply, but because of inflation will be sold at higher prices than would be obtained if inflation were low. Therefore, the company gains because of inflation and the profits will be higher than they otherwise would have been.
Exactly, the actual practice question says:
Which of the following organizations might benefit from a period of high price inflation?
A. An organization which has a large number of long-term payables
B.An exporter of goods to a country with low inflation
C. a large retailer with a high level of inventory on display and low rate of inventory turnoverI chose C, but the answer given at the back is A….. Don;t you think both A and C go with the question?
A, B and C are all correct.
B: high inflation makes a country’s currency weaken compared to the currency of a low inflation country. Ifmthe initial UK/US exchamge rate is 1.5 US$ per UK£, then exporting goods at a price of £100 will cost an American customer $150.
If the £ weake because of high UK inflation, then the exchange rate might move to ,say, 1.2 US$ per UK £. The exported goods would then be sold at $120 in the USA. They have become more competetive so helping the exporter.
How is it benefiting the exporter, Due to inflation, cost incurred in manufacturing the product is higher.. Since the importing country has lower inflation, the product in their country would be sold at a lower price and or even if it is available at a higher price nobody would buy hence the exporter would be at loss.
And for C, if you think of it deeply, low inventory turnover means, the inventory is not being replaced frequently which means inflation is high obviously its price would be high and nobody would buy it.. how is the retailer gaining?
I accept your point on B.
However I stick by my point on C as the eventual selling price will be much greater than originally planned. This will increase profits, which can be seen as a benefit. Presumablymthat os why you also chose C. Of course, when the higher profits are distributed they might not be worth more in terms of buying power.
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