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Epsom Co. manufactures furniture and sells about $40 million a year at a gross margin of 45%.

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Epsom Co. manufactures furniture and sells about $40 million a year at a gross margin of 45%.

a. What is the maximum inventory level the firm can carry to maintain an inventory turnover (based on COGS) of 8.0?

b. If the inventory contains $1.2 million of obsolete and damaged goods that don’t turn over at all, how fast would the active inventory have to turn over to achieve an overall turnover rate of 8.0?


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a First calculate COGS from the gross margin percentage Re...View the full answer


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Inventory turnover is a key metric that helps businesses evaluate the efficiency of their operations. A high turnover ratio is generally considered positive, indicating that the company is effectively selling its inventory and making efficient use of its resources. On the other hand, a low turnover ratio may indicate issues such as overstocking or slow sales and may require further examination to identify and address the underlying causes. Businesses use this ratio to make decisions about inventory levels, production schedules, and pricing strategies. It also helps businesses to identify areas where they may need to make improvements, such as reducing lead times for production or optimizing sales and marketing efforts. Additionally, inventory turnover is used by investors and analysts as a key performance indicator to evaluate the financial health and growth potential of a company.

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