Inventory Ratio Calculations McMahan, LTD. provided the following data for 2008

Question

Inventory Ratio Calculations

McMahan, LTD. provided the following data for 2008 and 2009:

Do not round until your final answers. Round all calculations to two decimal places.

(a) Calculate the inventory turnover ratio for 2008 and 2009.
2008 Answer times
2009Answer times

(b) Calculate the gross margin return on inventory investment for 2008 and 2009.
2008 Answer
2009 Answer

Inventory December 31, 2007 $178,000 December 31, 2008 187,000 December 31, 2009 194,000 Cost of goods sold 2008 $545,000 2009 590,000 Gross margin 2008 $253,000 2009 288,000

Explanation / Answer

Inventory turnover ratio = cost of goods sold / average inventory

For the year 2008,

Inventory turnover ratio = 545000 / 178000 + 187000 / 2

= 545000 / 182500

= 2.99 times

For the year 2009,

Inventory turnover ratio = 590000 / 187000+194000 / 2

= 590000 / 190500

= 3.09 times

b.Gross margin return on inventory investment = Gross margin / average inventory cost

For the year 2008:

Gross margin return on inventory investment = 253000 / 178000 +187000 / 2

= 253000 / 182500

= 1.39

For the year 2009:

Gross margin return on inventory investment = 288000 / 187000 + 194000 /2

= 288000 / 190500

= 1.51.

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