Large retailers like the Home Depot and Walmart typically use gross margin ratio

Question

Large retailers like the Home Depot and Walmart 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 the data for four scenarios, a base scenario (# 1) followed by three modifications (#s 2, 3, and 4) to the base scenario.

1 2 3 4

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

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

Explanation / Answer

1. gross margin percent= 4000/10000= .4 inventory turnover= 6000/6000= 1 GMROI= 4000/6000= .6667 2. gross margin percent= 8000/20000= .4 inventory turnover= 12000/6000= 2 GMROI= 8000/6000= 1.333 3. gross margin percent= 6000/12000= .5 inventory turnover= 6000/6000= 1 GMROI= 6000/6000= 1 4. gross margin percent= 4000/10000= .4 inventory turnover= 6000/5000= 1.2 GMROI= 4000/5000= .8

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