Data on Shin Inc for 2008 are shown below, along with the inventory conversion p

Question

Data on Shin Inc for 2008 are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. Note: This question is worth 2 points.

Cost of goods sold =
$78,000
Inventory =
$20,000
Inventory Conversion Period (ICP) =
93.59
Benchmark Inventory Conversion Period (ICP) =
38.00
Answer
a. $10,335
b. $14,612
c. $11,879
d. $11,285
e. $10,216

Explanation / Answer

Inventory Conversion period = Average inventory/Cost of goods sold x 365

38.00 days = Targeted inventory/$85,000 x 365

Targeted inventory = $8,849.32

If the inventory is brought down to $8,849.32, then the company will reach the benchmark ICP.

Decline in inventory = Existing inventory – Targeted inventory

Decline in inventory = $20,000 - $8,849.32

Decline in inventory = $11,150.68

Decline in inventory = $11,151 (rounded)

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