Question - To control operations, Waymor Company makes extensive and exclusive use of financial performance reports for each department. Although all departments have been reporting favorable cost variances in most periods, management is perplexed by the firm's low overall return on investment. You have been asked to look into the matter. Believing the purchasing department is typical of a company's operations, you obtained the following information concerning the purchase of parts for a product it started producing in 2007:
|
YEAR
|
PURCHASE PRICE VARIANCE
|
QUANTITY USED (UNITS)
|
AVERAGE INVENTORY (UNITS)
|
|
2007
|
1,000 f
|
20,000
|
5000
|
|
2008
|
10,000F
|
30,000
|
7500
|
|
2009
|
12,000F
|
35,000
|
10000
|
|
2010
|
20,000U
|
25,000
|
6250
|
|
2011
|
8000F
|
36,000
|
9000
|
|
2012
|
9500F
|
29,000
|
7250
|
A. Compute the inventory turnover each year. What conclusions can be drawn from a yearly comparison of the purchase price variance and inventory turnover?
B. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance.
C. Offer whatever recommendations you believe are appropriate.