Question

Inventory in the beginning of the year ₹ 60,000; Inventory at the end of the year ₹ 1,00,000. Inventory Turnover Ratio 8 Times; Selling price 25% above cost.

Compute the amount of Gross Profit and Revenue from Operations.

Answer 1

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

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

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

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

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

$$\text{Gross Profit} = \text{Cost of Revenue from Operations} \times 25\%$$

$$\text{Gross Profit} = ₹6,40,000 \times \frac{25}{100} = {₹1,60,000}$$

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

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