Question 26.Q7: Which two of the following are valid reasons why the invento...
Which two of the following are valid reasons why the inventory turnover period of a company increases from one year to the next?
1 A slow down in trading
2 A marketing decision to reduce selling prices
3 Seasonal fluctuations in orders
4 Obsolete goods
A 1 and 2
B 2 and 3
C 1 and 4
D 3 and 4
C A slow down in trade increases the inventory turnover period. Assuming that inventory is still being ordered at the same rate this can lead to a build up in inventory. Inventory levels also increase where there is no longer a demand for the product, for example due to obsolescence.
Seasonal fluctuations in orders will affect the amount of inventory held at any one time, but they will not affect inventory turnover period year on year. A decision to reduce sales price would not directly affect either purchase price or level of inventory. If anything, it would be likely to reduce inventory holding period as the company moves to a low margin, fast turnover approach.