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

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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