Question

A wholesaler operates in an industry where the average inventory turnover rate is 2.5. It buys products from the manufacturer at $10 apiece. The wholesaler successfully sold 12 million pieces to its retailers for $20 last year. Assuming the wholesaler’s beginning and ending inventories were $50 million and $30 million, respectively. Therefore, the inventory turnover rate of this wholesaler equals __________ last year. Compared to its peers in the same industry, this wholesaler is __________.

		2.0, less efficient.
		3.0, more efficient.
		3.5, less efficient.
		6.0, more efficient.
		2.5, less efficient.

Answer 1

Inventory Turnover rate= Cost of goods sold/ Average inventory

Cost of goods sold= Opening inventory+ Purchases- Closing inventory

=$50 million+(10*12 million)- $30 million = $140 million

Average Inventory= (Opening Inventory+Closing Inventory)/2

=(50+30)/2= $40 million

Inventory Turnover Rate= $140 million/$40million = 3.5

Compared to its peers in the industry, the wholesaler is less efficient.