Question

The following information is available for MVF Company (dollar amounts are in millions):

	2016	2015	2014	2013
Net sales	$23.2	$21.7	$19.6	$17.4
Cost of goods sold	17.1	16.8	15.2	13.5
Beginning finished goods inventory	2.3	2.1	1.9	1.5
Ending finished goods inventory	2.9	2.3	2.1	1.9
Materials purchased	10.6	8.8	7.5	7.1

1. Calculate the following ratios for each year:

• Gross profit percentage.
• Inventory turnover.
• Cost of materials purchased to cost of finished goods produced.

1. Analyze the results obtained in 3.a. above:

• Describe the change in each ratio you observe in 2016.
• Discuss at least two possible causes of each change observed.

Answer 1

Describe the change in each ratio you observe in 2016.

Gross profit % has increased till 2015, and there is a short fall in 2016. It is a measure of how much operating profit the business made on total sales. It shows how profitable the core business activities are. Reasons for decrease:

• Could be due to starting to lose the market share.
• Could be due to offering high discounts to maintain previous year sales.

Inventory turnover ratio has decreased over the years.It is a measure of how many times average inventory is turned or sold during a period. This shows how efficiently inventory is managed by the business. Reasons for decrease:-

• May be there was increase in cost of goods sold, due to increase in purchase prices.
• May be some invetory has become obsolete

Cost of materials purchased to cost of finished goods produced has increased over the period. Reasons for increase:-

• Purchase of excessive amount of direct material
• Material purchased was not utilised efficiently, there by making more wastage.