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

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. (Please show all formulas)

Cost of goods sold =                        $85,000

Inventory =                                                  $20,000

Inventory conversion period (ICP) = 85.88

Benchmark inventory conversion period (ICP) = 38.00

Explanation / Answer

Benchmark inventory conversion period (ICP) = Inventory / Cost of goods sold per day

38 = Inventory / 232.88

Inventory = 232.88 * 38

  Inventory = $ 8849 (approx)

(NOTE 1) :- Cost of goods sold per day = 85000 / 365 = $ 232.88 (approx)

Decline in inventory = 20000 - 8849 = $ 11151

Conclusion:- Inventory would decline by $ 11151

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