Question

Revenue from operations Rs. 2,00,000, Inventory Turnover Ratio 5, Gross Profit 25%. Find out the value of Closing Inventory, if Closing Inventory is Rs. 8,000 more than the Opening Inventory.

Answer 1

Given:

              Revenue from operation(R) = Rs. 2,00,000

              Inventory Turnover Ratio(ITR) = 5

                                    Gross Profit = 25%

To Find:

             Closing and Opening Inventory.

Solution:

Let us assume that the Opening Inventory is '$x$'.

Then, According to the Question, the Closing Inventory will be,

                                             $x+8,000$

By using the formula of Average Inventory,

               $Average~Inventory = \frac{Closing~Inventory ~+ ~Ope#ning Inventory}{2}$

               $Average~Inventory = \frac{ x~+~x~+~8000}{2}~~<----------Eq(1)$

Now, the gross profit is,

                         $Gross~Profit = \frac{25}{100}*2,00,000$

                         $Gross~Profit =25*2,000$

                         $Gross~Profit = 50,000$

So, the gross profit is 50,000.

Now, using the formula of Inventory Turnover Ratio(ITR),

                                       $ITR = \frac{Cost~of~Revenue}{Average~Inventory}$

Cost of Revenue is the net revenue from the operations. i.e,

                  $Cost~of~Revenue = R-Gross~Profit$

                  $Cost~of~Revenue = 2,00,000-50,000\\Cost~of~Revenue = 1,50,000$

So, From equation (1),

                                             $5 = \frac{1,50,000}{\frac{x+x+8000}{2} }$

                                             $5 = \frac{1,50,000*2}{x+x+8000}$

                      $5(x+x+8000)=3,00,000$

                               $2x+8000=\frac{3,00,000}{5} \\\\2x=60,000-8000$

                                            $x=\frac{52,000}{2}$

                                            $x=26,000$

Since We had assumed the '$x$' Opening Inventory.

So, Opening Inventory is Rs. 26,000 and,

      Closing Inventory is Rs. 26,000 + 8,000,i.e.,

      Closing Inventory is Rs. 34,000