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# 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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