Question

Opening Inventory ₹ 60,000; Inventory at the end ₹ 1,00,000; Inventory Turnover Ratio 8 Times; Selling Price 25% above cost. Calculate Gross Profit Ratio.

Answer 1

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

$$\text{Average Inventory} = \frac{₹60,000 + ₹1,00,000}{2} = \frac{₹1,60,000}{2} = {₹80,000}$$

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

$$8 = \frac{\text{Cost of Revenue from Operations}}{₹80,000}$$

$$\text{Cost of Revenue from Operations (COGS)} = 8 \times ₹80,000 ={₹6,40,000}$$

$$\text{Gross Profit} = \text{Cost of Revenue from Operations} \times 25\%$$ 
$$\text{Gross Profit} = ₹6,40,000 \times \frac{25}{100} = {₹1,60,000}$$

$$\text{Revenue from Operations (Sales)} = \text{Cost of Revenue from Operations} + \text{Gross Profit}$$

$$\text{Revenue from Operations (Sales)} = ₹6,40,000 + ₹1,60,000 ={₹8,00,000}$$

$$\text{Gross Profit Ratio} = \frac{\text{Gross Profit}}{\text{Revenue from Operations}} \times 100$$

$$\text{Gross Profit Ratio} = \frac{₹1,60,000}{₹8,00,000} \times 100 = {20\%}$$