Question

A trading firm’s average inventory is Rs 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm.

Answer 1

`"Inventory Turnover ratio" = "Cost of revenue from operations"/"Average Inventory"`

`"or". 8 = "Cost of revenue from operations"/"20,000"`

`"or", "Cost of revenue from operations" = "20,000"xx" 8`

or, Cost of revenue from operations = 1,60,000

Let Sale Price be Rs 100

Then Profit is Rs 20

Hence, the Cost of Revenue from Operations = Rs 100 − Rs 20 = Rs 80

If the Cost of Revenue from Operations is Rs 80, then Revenue from Operations = 100

If the Cost of Revenue from Operations is Rs 1, then Revenue from Operations =`100/8`

If the cost of revenue from operations is 1,60,000 then.

`"Revenue from operations" = 100/80 xx 1,60,000 = 2,00,000`

Profit = Net Revenue from Opeartions - Cost of revenue from operations

= 2,00,000 - 1,60,000

= 40,000