Question

What is the GMROI for each of the following merchandise categories in a bookstore?

                                    Textbooks       General                       Reference        Newspapers

Reading                      Books              Magazines

Annual sales                $800,000          $450,000                      $600,000          $100,000

Average
inventory
(at cost)                       $70,000 $110,000                      $250,000          $10,000

Gross margin              10%                 25%                             40%                 12%

Which of these categories is most profitable for the bookstore? Should the bookstore eliminate the least profitable category?

4.         What is the annual inventory turnover for a retailer with the following monthly sales levels?

Month	Sales	BOM Inventory at Cost
January	$14,000	$40,000
February	13,000	38,000
March	13,000	39,000
April	17,000	41,000
May	16,000	40,000
June	14,000	38,500
July		40,000

5.         What are the retail and cost inventory values of Sound Music at the end of the month of October based on the following accounting information?

1. BOM inventory worth $200,000 at cost and $300,000 at retail.
2. Purchases made during the month worth $250,000 at cost and $300,000 at retail.
3. $14,000 paid for freight charges.
4. $260,000 net sales at retail with cost of goods sold of $180,000.
5. $10,000 total markdowns.
6. $300 in employee discounts.
7. $4,800 allowance for shrinkage.

Answer 1

Which of these categories is most profitable for the bookstore? Should the bookstore eliminate the least profitable category?

The most profitable category (profitable in terms of having the greatest return on investment — highest GMROI) is newspapers and magazines and the least profitable is reference books. However, eliminating reference might not be a wise decision. The reference books might attract people to the bookstore. When they visit the store to buy reference books, they might also purchase merchandise in other, more profitable, categories.

4.

The total sales for the first six months are $87,000. The annualized sales is $174,000 — two times the sum of the monthly sales over the first six months.

The best estimate of the average inventory over the first six months is the sum of the seven BOM inventory levels divided by 7 = $39,500.

The inventory turnover is $174,000 / 39,500 = 4.4