The operations manager at a lumber supply company is analyzing how well his company is using its resources. He knows that sales for the past year were $3.5 million. He also knows that he had $850,000 in inventory twelve months ago, and he currently has $550,000. What important ratio can he calculate from this information?
A) He can determine that his inventory turnover is 5.
B) He can determine that his inventory turnover is 11.6.
C) He can determine that his net profit margin is 20%.
D) He can determine that his accounts receivable turnover is 20%.

Question

Quizplus · Accepted Answer

The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory. In this scenario, the average inventory is ($850,000 + $550,000) / 2 = $700,000. Assuming sales are a proxy for COGS, the inventory turnover is $3,500,000 / $700,000 = 5.

The Operations Manager at a Lumber Supply Company Is Analyzing