CFA Level I · CFA Level I Exam · Analysis of Inventories
Over two years, a manufacturer's inventory turnover fell while its gross margin rose and its payables turnover was unchanged. Which explanation is most likely consistent with these observations?
The most likely explanation is that the company is accumulating slow-selling higher-priced products. Inventory builds faster than cost of sales, lowering turnover, while the pricing or mix lifts gross margin. Just-in-time would raise turnover, and write-downs would reduce margin.
- AThe company is building inventory of slow-selling higher-priced productsCorrect
- BThe company shortened its production cycle using just-in-time methods
- CThe company wrote down obsolete inventory to net realisable value
Explanation
Falling turnover with rising margin suggests stock is accumulating while prices or mix are favourable, which fits building slow-selling premium stock. Just-in-time would raise turnover. A write-down would add to cost of sales, lowering gross margin.
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