Retailers closely watch a number of financial ratios, including the gross profit (gross margin) percentage and inventory turnover. Suppose the results for the furniture department in a large store in a given year were as follows:
Sales ............ $6,000,000
Cost of goods sold ........ 3,600,000
Gross profit .......... $2,400,000
Beginning inventory ...... $1,300,000
Ending inventory ........ $1,100,000
1. Compute the gross profit percentage and the inventory turnover.
2. Suppose the retailer is able to maintain a reduced average inventory of $1,000,000 during the succeeding year. What inventory turnover would have to be obtained to achieve the same $2,400,000 gross profit? Assume that the gross profit percentage is unchanged.
3. Suppose the retailer maintains inventory at the $1,000,000 level throughout the succeeding year but cannot increase the inventory turnover from the level in requirement 1. What gross profit percentage would have to be obtained to achieve the same total gross profit?
4. Suppose the average inventory of $1,200,000 is maintained. Compute the total gross profit in the succeeding year if there is
a. A 10% increase of the gross profit percentage (that is, 10% of the percentage, not an additional 10 percentage points) and a 10% decrease of the inventory turnover.
b. A 10% decrease of the gross profit percentage and a 10% increase of the inventory turnover.
5. Why do retailers find the preceding types of ratios helpful?