Question

 Inventory Management Metrics

 Large retailers like Costco and Target typically use gross margin ratio (gross margin sales), inventory turnover (sometimes referred to as inventory tums), and gross margin return on investmient (GMROI) to evaluate how well inventory has been managed. The goal is to maximize profits while minimixing the investment in inventory. Below are data for four scenarios, a base scenario (A) followed by there modifications (B, C, & D) to the base scenario.

 Required

 For each scenario calculate the gross margin percent, the inventory turnover, and GMROI.

Answer 1

1 Gross margin percentage

Gross margin percentage = (Gross profit / sales) × 100

Scenario A = (12,000 / 30,000) × 100 = 40%

Scenario B = (30,000 / 60,000) × 100 = 50%

Scenario C = (21,000 / 36,000) × 100 = 58.33%

Scenario D = (15,000 / 30,000) × 100 = 50%

Gross profit margin percentage in scenario A is 40% in scenario B is 50% in scenario C is 58.33% and in scenario D is 50%.

2 Inventory turnover

Inventory turnover = cost of goods sold / average inventory

Scenario A = 18,000 / 9,000 = 2 times

Scenario B = 30,000 / 9,000 = 3.33 times

Scenario C = 15,000 / 9,000 = 1.67 times

Scenario D = 15,000 / 7,500 = 2 times

Inventory turnover ratio in scenario A is 2 times , scenario B is 3.33 times , scenario C is 1.67 times and scenario D is 2 times.

3 Gross Margin Return On Investment

GMROI = Gross profit / average inventory

Scenario A = 12,000 / 9,000 = 1.33 times

Scenario B = 30,000 / 9,000 = 3.33 times

Scenario C = 21,000 / 9,000 = 2.33 times

Scenario D = 15,000 / 7,500 = 2 times

Gross margin return on investment in scenario A 1.33 times , scenario B 3.33 times, scenario C 2.33 times and scenario D 2 times.

The above are the detailed calculations and equations of gross margin percentage, inventory turnover and gross margin return on investment in different scenarios.

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