Impact of Reducing Inventory Levels on Company Efficiency

Hard Working Capital Management Inventory Management

ABC Corp. is analyzing its inventory management practices to improve efficiency and reduce costs. The company primarily deals in consumer electronics and carries both high-turnover and low-turnover items. ABC Corp.'s management is particularly concerned about its inventory turnover ratio, which currently stands at 4. The CFO is considering a strategy that involves a significant reduction in the average inventory level. This decision is expected to minimize the holding costs associated with excess inventory.

Which of the following scenarios is most likely to result from a successful reduction in average inventory level without negatively impacting sales?

An increase in the company's current ratio due to lower inventory on the balance sheet.

A decrease in the inventory turnover ratio indicating inefficient inventory management.

An increase in return on assets (ROA) due to enhanced efficiency in managing working capital.

Hint

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