Question

Opening Inventory ₹ 2,00,000; Closing Inventory ₹ 1,20,000. Inventory Turnover Ratio 8 Times; Selling price 25% above cost. Calculate Gross Profit Ratio.

Answer 1

Calculation of Average Inventory:

\[\text{Average Inventory} = \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}\]

$$\text{Average Inventory} = \frac{2,00,000 + 1,20,000}{2} = \frac{3,20,000}{2}$$

$${\text{Average Inventory} = ₹ 1,60,000}$$

Calculation of Cost of Revenue from Operations:

$$\text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$$

$$8 = \frac{\text{Cost of Revenue from Operations}}{1,60,000}$$

$$\text{Cost of Revenue from Operations} = 8 \times 1,60,000$$

$${\text{Cost of Revenue from Operations (COGS)} = ₹ 12,80,000}$$

Calculation of Gross Profit Ratio:

We are given that the Selling price is 25% above cost. This means:

$$\text{Gross Profit Rate on Cost} = 25\% = \frac{25}{100} = \frac{1}{4}$$

To convert Gross Profit rate from Cost to Revenue from Operations (Sales):

$$\text{Gross Profit Rate on Revenue} = \frac{\text{Profit Portion}}{\text{Cost} + \text{Profit}} = \frac{1}{4 + 1} = \frac{1}{5}$$

$$\text{Gross Profit Ratio} = \frac{1}{5} \times 100 = 20\%$$

Gross Profit Ratio = 20%