Inventory Management Metrics Large retailers like Costco and Target typically us

Question

Inventory Management Metrics Large retailers like Costco and Target typically use gross margin ratio (gross margin /sales), inventory turnover (sometimes referred to as inventory turns), and gross margin return on investments (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 4 scenarios, a base scenario (A), followed by 3 modifications (B,C, &D) to the base sceranio.

Scenario A B C D

Sales $10,000 20,000 12,000 10,000

Cost of goods sold 6,000 12,000 6,000 6,000

Gross profit $4000 8,000 6,000 4,000

Average inventory $6,000 6,000 6,000 5,000

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

Explanation / Answer

Scenario C well inventory Ratio 2 has well been managed.GP margin Scenario B is more preferable.

Amounts in$ Scenario A B C D Sales 10000 20000 12000 10000 Cost of goods sold 6000 12000 6000 6000 Gross profit 4000 8000 6000 4000 Average inventory 6000 6000 6000 5000 1 gross margin percent=Gross profit/Sales 40% 40% 50% 40% 2 inventory turnover ratio=Cost of goods sold/Average inventory 1 2 1 1.2 3 Gross Margin Return On Investment - GMROI=gross profit/Avg inventory 0.67 1.33 1.00 0.80

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