VMC: What Is Inventory Conversion?
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Definition of Inventory Conversion Period
- The inventory conversion period is the timeframe that encompasses the process of obtaining the raw materials, manufacturing, to selling the product.
- It helps the firms estimate the timespan between the day raw materials are bought to the day the product is sold.
- The ideal inventory conversion ratio differs between industries.
What is the Formula for Inventory Conversion?
- To calculate the inventory conversion period, divide the average inventory by cost of goods sold per day.
Inventory conversion period = inventory/cost of goods sold per day
Inventory Conversion in Practice
- If the average inventory of Walter pharmacy is $800 and the annual cost of goods sold is $146,000. What is the inventory conversion period of Walter’s pharmacy?
- As the cost of goods sold is given in years, it has to be converted into days. So $146,000/ 365 days = $400 per day.
- Now the information can be plugged in the formula:
- $800/ $400 = 2 days
- In conclusion, Walter pharmacy can purchase raw material, manufacture, and sell the products, all within two days.
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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.