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 gross profit of 20% on sale, ascertain the gross profit of the firm.

Answer 1

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

`8 = "Cost of revenue from operations"/(20,000)`

Cost of revenue from operations = 20,000 × 8

Cost of revenue from operations = 1,60,000

Let Sale Price be Rs. 100

Then Gross Profit is Rs. 20% of 100 = 20

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

= Rs 80

Gross Profit on Cost = `"Gross Profit"/"Cost" xx 100`

= `20/80 xx 100`

= 25% on Cost

Gross Profit = `"Cost of Revenue from Operations" xx 25/100`

Gross Profit = `1,60,000 xx 25/100`

= 40,000