Question

A Trader carries an Average Inventory of ₹ 1,00,000. His Inventory Turnover Ratio is 8 Times. He sells goods at a profit of 25% of cost. Calculate Gross Profit Ratio.

Answer 1

Calculation of Cost of Revenue from Operations:

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

$$8 = \frac{\text{Cost of Revenue from Operations}}{1,00,000}$$

$$\text{Cost of Revenue from Operations} = 8 \times 1,00,000$$

$${\text{Cost of Revenue from Operations (COGS)} = ₹ 8,00,000}$$

Calculation of Gross Profit Ratio:

We are given that profit is 25% of cost.

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

To change the 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%