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15 March, 18:51

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?

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  1. 15 March, 21:47
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    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!
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