CPIM Practice Exam

What does inventory turnover indicate about a business?

1. The efficiency in managing production schedules

2. The speed at which a company can sell its inventory

3. The amount of inventory a company needs to maintain

4. The profitability of inventory transactions

The correct answer is: The speed at which a company can sell its inventory

Inventory turnover is a key performance metric that reflects how efficiently a company manages its inventory by showing the rate at which inventory is sold and replaced over a specific period, typically a year. When a business has a high inventory turnover ratio, it suggests that the company is effectively converting its stock into sales quickly, indicating strong demand for its products or efficient inventory management practices. Understanding this metric is crucial for businesses because it helps in assessing whether a company is overstocked or understocked. A higher turnover rate can signify effective sales strategies and inventory control, enabling a business to minimize holding costs while maximizing profitability through timely sales. In contrast, while options like managing production schedules, determining the amount of inventory needed, and evaluating profitability are important aspects of inventory management and operations, they do not directly reflect the effectiveness with which a business sells its inventory. Therefore, the best indication of inventory turnover specifically relates to the speed at which a company can sell its inventory.