Tefft Industries has an average inventory of $170,000, sells on terms of 2/10, net 30, and its cost of sales is $540,000. What is Tefft's inventory conversion period?
A) 85 days
B) 115 days
C) 105 days
D) cannot be determined from the data given
Answer:
The answer is B) 115 Days.
The inventory conversion period is the time required to obtain materials for a product, manufacture it, and sell it. The inventory conversion period is essentially the time period during which a company must invest cash while it converts materials into a sale.
Decreasing an inventory conversion period improves a company's cash conversion cycle, which, in turn, reduces the organization's working capital requirements and increases its cash flow.
Explanation:
Step 1
> Average Inventory = $ 170,000
> Cost of Sales = $ 540,000
The formula for Inventory Conversion Period (or Days Sales Of Inventory) is given as
Inventory Conversion Period = Average Inventory÷(Cost of Sales÷365)
Step 2
ICP = 170,000 ÷ (540,000÷365)
= 170,000 ÷ (1479.45205479)
= 114.907407408
Approximating the above to the nearest whole number gives us 115.
Therefore Tefft's Inventory conversion period is 115 days.
Cheers!
