Inventory Management Metrics Large retailers like The Home Depot and Wal-Mart ty

Question

Inventory Management Metrics
Large retailers like The Home Depot and Wal-Mart typically use gross margin ratio (gross margin ÷ sales), inventory turnover (sometimes referred to as inventory turns), and gross margin return on investment (GMROI) to evaluate how well inventory has been managed. The goal is to maximize profits while minimizing the investment in inventory. Below are data for four scenarios, a base scenario (# 1) followed by three modifications (#s 2, 3, & 4) to the base scenario.

For each scenario calculate the gross margin percent, the inventory turnover, and GMROI.

Round your answers to one decimal place. (Example for % answers -- 99.9%)

Scenario 1 Scenario 2 Scenario 3 Scenario 4 Sales $10,000 $20,000 $11,000 $10,000 Cost of goods sold 8,000 16,000 8,000 $8,000 Gross profit $2,000 $4,000 $3,000 $2,000 Average inventory $9,000 $9,000 $9,000 $8,000

Explanation / Answer

Gross Margin %=Gross profit*100/Sales

Inventory Turnover=Sales/Inventory

GMROI=Gross margin/Average Inventory

Ratios 1 2 3 4 Gross Margin % 20% 20% 27.27% 20% Inventory Turnover 1.11 2.22 1.22 1.25 GMROI 0.22 0.44 0.33 0.25

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