If the inventory turnover ratio is 5 times and the average stock at cost is Rs. 75,000, find the cost of goods sold.
Answer (2)
To find the cost of goods sold (COGS), you need to use the inventory turnover ratio formula. The inventory turnover ratio indicates how many times a company's inventory is sold and replaced over a period. It is calculated using the following formula:
Inventory Turnover Ratio = Average Inventory Cost of Goods Sold (COGS)
In this problem, you are given:
Inventory Turnover Ratio = 5 times
Average Inventory at Cost = Rs. 75,000
We need to find the Cost of Goods Sold (COGS). You can rearrange the formula to solve for COGS:
COGS = Inventory Turnover Ratio × Average Inventory
Substitute the given values into the formula:
COGS = 5 × 75 , 000
Now, perform the multiplication:
COGS = 375 , 000
Therefore, the cost of goods sold is Rs. 375,000.
This problem is commonly encountered in business studies, especially when discussing inventory management and financial analysis in High School or introductory College courses. Understanding inventory turnover ratios is crucial for businesses to manage their stock efficiently and ensure they are meeting consumer demand without overstocking.
The cost of goods sold (COGS) can be determined using the inventory turnover ratio formula. Given an inventory turnover ratio of 5 times and average inventory of Rs. 75,000, the COGS is calculated as Rs. 375,000. This calculation aids businesses in managing their inventory efficiently.
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