Question

what will be the amount of gross profit of the firm if it's average inventory is 80000 if inventory turn over ratio is 6 times and the selling price is 25 %above cost ?​

Answer 1

Given:

• The inventory turnover ratio of a firm is 6 times.
• Its average inventory is Rs 80,000.
• The selling price is 25% above the cost [cost of RFO.]

To find: The gross profit.

Answer:

Inventory turnover ratio = Cost of Revenue from Operations ÷ Average inventory

We have the ratio and the average inventory. We need the cost.

6 = Cost of RFO ÷ Rs 80,000

Rs 4,80,000 = Cost of RFO

As per the question,

Gross profit = Cost of RFO × 25%

Gross profit = Rs 4,80,000 × 25%

Gross profit = Rs 1,20,000

Therefore, the gross profit of the firm is Rs 1,20,000.

An Inventory Turnover Ratio is a ratio that describes the relationship between the cost of revenue from operations and the average inventory of the firm. It is one among the four main Activity Ratios, which mainly deal with the firm's assets and resources. The other three activity ratios include:

• Trade Receivables Turnover Ratio
• Trade Payables Turnover Ratio
• Working Capital Turnover Ratio