Question

The average inventory of AB Ltd. is \rupee 1,00,000 and the inventory turnover ratio is 6 times. Calculate the amount of revenue from operations if goods are sold at a profit of 25\% on revenue from operations.

Hint:

The formula for inventory turnover ratio helps determine cost of goods sold, which is used to calculate revenue when the profit margin is known.

Answer 1

The inventory turnover ratio is calculated as: \[ \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \] Given the ratio is 6 times: \[ \text{COGS} = 6 \times \rupee 1,00,000 = \rupee 6,00,000 \] Revenue from operations includes a profit of 25\%: \[ \text{Revenue from Operations} = \text{COGS} + \text{Profit} \] Profit is calculated as: \[ \text{Profit} = 25\% \times \text{Revenue from Operations} \] Let \( R \) be the Revenue from Operations: \[ R - 0.25R = \rupee 6,00,000 \] \[ 0.75R = \rupee 6,00,000 \] \[ R = \rupee 8,00,000 \] Thus, the revenue from operations is \rupee 8,00,000.