Final answer:
False. According to the square root law of cycle stocks, an increase in sales should result in a decrease in the inventory-to-sales ratio.
Step-by-step explanation:
The square root law of cycle stocks states that as sales increase, the inventory-to-sales ratio should decrease, not increase. This means that as sales increase, companies should aim to reduce their inventory levels to maintain a balanced inventory turnover rate. Increasing the inventory-to-sales ratio would indicate that a company is holding excess inventory, which can lead to storage costs, obsolescence, and reduced profitability.
For example, let's say a company has a monthly sales of $10,000 and an average inventory level of $5,000. The inventory-to-sales ratio would be 0.5 ($5,000 / $10,000). If sales increase to $15,000, the company should aim to reduce its inventory level to maintain the same ratio. As a result, the inventory level should decrease to $7,500, maintaining an inventory-to-sales ratio of 0.5.