M7-21 - M7-21 a. Cost of goods sold ÷ Average inventory =...

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Unformatted text preview: M7-21 a. Cost of goods sold ÷ Average inventory = Inventory turnover 2008: $546,000 ÷ [($176,000 + $185,000)/2] = 3.02 times 2009: $589,000 ÷ ([$185,000 + $194,000)/2] = 3.11 times b. Gross margin return on inventory investment = Gross Margin ÷ Average inventory 2008: $256,000 ÷ [($176,000 + $185,000)/2] = 1.42, or 142% 2009: $287,000 ÷ [($185,000 + $194,000)/2] = 1.51, or 151% c. Inventory turnover and gross margin return on inventory investment are indicators of how well a company is using its inventory to produce profits. The goal is to maximize profits with the lowest level of inventory. McMahan had favorable performance in 2009, using 2008 as a base line. Although inventories have increased in each of the last three years, gross margin has also increased, resulting in an increase in GMROI from 142% to 151%. From this perspective, McMahan has become more lean over this two-year period. McMahan should also compare these ratios with those of major competitors, other similar companies, and maybe for the entire industry in which it operates. ...
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