A Trading Firm’s Average Inventory Is Rs 20,000 (Cost). If The Inventory Turnover Ratio Is 8 Times And The Firm Sells Goods At A Profit Of 20% On Sale, Ascertain the Profit of the firm.
A trading firm’s average inventory is Rs 20,000 (cost). If the inventory turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm.
Inventory Turn Over Ratio
Or,8
Or, Cost of Revenue from Operations
= 20,000 ❌ 8
= 1,60,000
Let Sales Price be Rs. 100
∴ Profit is Rs.20
Hence, the Cost of Revenue from Operations
= Rs. 100 - Rs. 20
= Rs. 80
If the Cost of Revenue from Operations = Rs. 100 - Rs. 20 = Rs. 80
If the Cost of Revenue from Operations is Rs. 80, then Revenue from Operations = 100
If the Cost of Revenue from Operations is Rs. 1, then Revenue from Operations = ``\frac{100}{8}``
If the Cost of Revenue from Operations is Rs. 1,60,000 then,
Revenue from Operations = ``\frac{100}{8}\times1,60,000`` = 2,00,000
Now, Profit = Net Revenue from Operations - Cost of Revenue from Operations
= 2,00,000 - 1,60,000
= 40,000
Alternative Method:
Stock Turn Over Ratio
Cost of Good Sold = 20,000 ╳ 8 = 1,60,000
If, Sales as X then,
Cost of Good Sold = Net Sales - Profit on Sales
or, 1,60,000 = X - 20% of X
or, 1,60,000 = X - `\frac{20}{100}`❌ X
or, 1,60,000 = `\frac{100x-20x}{100}`
= `\frac{80x}{100}`
X = `\frac{1,60,000 ╳ 100}{80}` = 2,00,000
Now, Profit = Net Revenue from Operations - Cost of Revenue from Operations
= 2,00,000 - 1,60,000
= 40,000
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