Question

Scott Walker Company reported the following data for the past​ year: Net sales $ 470,000 Purchases $ 220,000 Beginning Inventory $ 110,000 Ending Inventory $ 170,000 Cost of Goods Sold $ 290,000 Industry Averages available​ are: Inventory Turnover 5.00 Gross Profit Percentage ​50% How do the inventory turnover and gross profit percentage for Scott Walker Company compare to the industry averages for the same​ ratios? (Round inventory turnover to two decimal places. Round gross profit percentage to the nearest​ percent.)

Answer 1

Inventory turnover ratio is ratio of cost of goods sold to average inventory.

Given:

Cost of goods sold = $290,000

Beginning inventory = $110,000

Ending inventory = $170,000

Average inventory = [(110,000 + 170,000) / 2]

= 280,000 / 2

= $140,000

Inventory Turnover Ratio = Cost of goods sold / Average inventory

= 290,000 / 140,000

= 2.07 times

Scott Walker company's inventory turnover ratio is 2.07 times.

Gross profit margin is ratio of gross profit to net sales.

Gross profit = Net sales – cost of goods sold

= 470,000 – 290,000

= $180,000

Gross profit percentage = Gross profit / net sales

= 180,000 / 470,000

= 0.38 or 38%

Scott Walker company's gross profit percentage is 38%.

The industrial averages of inventory turnover and gross profit percentage is 5 times and 50% respectively. Scott's inventory turnover is 58% lesser than industrial average which is not a good indicator. This means conversion of inventory to sales is very low. Gross profit margin is also 12% lesser, which means that the company is making much lesser profits as compared to its competitors.