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HIGH PRICE INFLATION

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA BT – FIA FBT › HIGH PRICE INFLATION

  • This topic has 5 replies, 2 voices, and was last updated 6 years ago by Ken Garrett.
Viewing 6 posts - 1 through 6 (of 6 total)
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  • December 21, 2018 at 3:51 pm #492448
    draiells
    Member
    • Topics: 123
    • Replies: 141
    • ☆☆☆

    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?

    December 21, 2018 at 4:41 pm #492451
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10594
    • ☆☆☆☆☆

    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.

    December 22, 2018 at 2:38 am #492465
    draiells
    Member
    • Topics: 123
    • Replies: 141
    • ☆☆☆

    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 turnover

    I chose C, but the answer given at the back is A….. Don;t you think both A and C go with the question?

    December 22, 2018 at 9:48 am #492492
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10594
    • ☆☆☆☆☆

    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.

    December 23, 2018 at 12:25 pm #492535
    draiells
    Member
    • Topics: 123
    • Replies: 141
    • ☆☆☆

    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?

    December 23, 2018 at 3:33 pm #492554
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10594
    • ☆☆☆☆☆

    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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  • The topic ‘HIGH PRICE INFLATION’ is closed to new replies.

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