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A company sold 8,400 units last year. Average inventory investment was $42,000. What was the inventory turns ratio, knowing that the unit cost is $207?
The inventory turns ratio is a financial metric that measures how efficiently a company manages its inventory. The inventory turns ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory investment. The cost of goods sold is the direct cost of producing or purchasing the goods sold by the company. The average inventory investment is the average value of the inventory held by the company over a period of time. A higher inventory turns ratio indicates a higher inventory turnover and a lower inventory holding cost.
In this case, the company sold 8,400 units last year, and the unit cost is $207. Therefore, the cost of goods sold is:
COGS = Unit cost x Units sold = 207 x 8,400 = $1,738,800
The average inventory investment was $42,000. Therefore, the inventory turns ratio is:
Inventory turns ratio = COGS / Average inventory investment = 1,738,800 / 42,000 = 41.4
To express the inventory turns ratio as a whole number, we can round it to the nearest integer. Therefore, the inventory turns ratio is 5.