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?

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!