Audit and Assurance Practice Exam

If a company introduced a new product with a low price point, what change is expected in the inventory turnover?

1. It is expected to remain unchanged

2. It is expected to increase

3. It is expected to decrease

4. It is expected to fluctuate frequently

The correct answer is: It is expected to increase

When a company introduces a new product at a low price point, it typically aims to attract a larger customer base and stimulate higher sales volumes. This increase in sales can lead to a more rapid turnover of inventory due to the higher demand for the product. Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory during a specific period. With a low price point product generating more sales, COGS is likely to increase significantly if the demand is robust, while the inventory may be sold off more rapidly. Consequently, the ratio of COGS to average inventory will increase, resulting in a higher inventory turnover. Additionally, a successful low-price strategy often attracts increased consumer interest, leading to quicker sales cycles and reducing the time that inventory sits unsold. The overall expectation is that as sales accelerate against a potentially stable or even slightly decreasing average inventory level, the inventory turnover ratio will rise accordingly.