Question

Pedee Company's inventory turnover in days is 80 days. Which of the following actions could help to improve that ratio? a.Increase the sales price. b.Increase manufacturing costs. c.Reduce the cost of goods sold. d.Reduce average inventory. e.All of these.

Answer 1

Answer:

d. Reduce average Inventory

Explanation:

Inventory turnover ratio represents how quickly an entity's inventory is converted into sales and cash is generated.

Inventory turnover in days is computed as;

= $\frac{365\ days}{Inventory\ Turnover\ ratio}$

Inventory turnover ratio can be computed as:

= $\frac{Cost\ of\ goods\ sold}{Average\ Stock}$

Average stock = $\frac{Op\ stock\ +\ Closing\ Stock}{2}$

wherein,  Op stock = Opening stock

Cost of Goods Sold = Sales - Gross Profit

A reduction in the average inventory level would increase the inventory turnover ratio, and thus reduce the inventory conversion period from 80 days to a lower level.