Question

The Revenue from operation of a firm is ₹ 6,00,000. Its inventory turnover ratio is 3 times. If gross profit ratio is 25%, calculate its opening inventory and closing inventory. The opening inventory is 25% of closing inventory.

Answer 1

Cost of Revenue from operations = Revenue from operations – Gross profit

= ₹ 6,00,000 – (6,00,000 × 25%)

= ₹ 4,50,000

Average inventory = `("Opening inventory"+"Closing inventory")/2`

Let, closing inventory be = x

opening inventory be = x × 25%

= `x/4`

Average inventory = `(x/4+x)/2`

= `(4x+x)/(4/2)`

= `(5x)/(4/2)`

= `(5x)/8`

Inventory turnover ratio = `(₹4,50,000)/((5x)/8)`

3 = `(₹ 4,50,000xx8)/(5x)`

15x = ₹ 36,00,000

x = `(₹36,00,000)/15` 

x = ₹ 2,40,000

Closing inventory = x = ₹ 2,40,000

Opening inventory = x × 25%

= ₹ 2,40,000 × 25%

= ₹ 60,000