M7-27 - E7-27 a. Scenario 1 Scenario 2 Scenario 3 Scenario...

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Unformatted text preview: E7-27 a. Scenario 1 Scenario 2 Scenario 3 Scenario 4 Gross Margin % (1) Gross profit $4,000 $8,000 $6,000 $4,000 (2) Sales $10,000 $20,000 $12,000 $ $10,000(1÷2) Gross Margin % 40% 40% 50% 40% Inventory Turnover (1) Cost of goods sold (2) Average inventory 6,000 12,000 6,000 6,000 $6,000 $6,000 $6,000 2 1 1.2 $5,000 (1)÷(2) Inventory Turnover 1 Gross Margin Return on Inventory Investment (1) Gross profit $4,000 $8,000 $6,000 $4,000 (2) Average inventory $6,000 $6,000 $6,000 $5,000 (1)÷(2) GMROI 66.7% 133% 100% 80% 8 b. Scenario 2 represents an increase in GMROI from 66.7% to 133% resulting from increasing inventory turnover while holding gross margin percent and the level of inventory unchanged. Scenario 3 represents an increase in GMROI from 66.7% to 100% as a result of increasing prices and gross margin percent from 40% to 50% while holding inventory level and inventory turnover unchanged. Scenario 4 represents an increase in GMROI from 66.7% to 80% by lowering inventory level and increasing inventory turnover while holding sales and gross margin percent constant.c. From the above analyses, we can see that GMROI is driven by two factors: gross margin percent and inventory turnover. Gross margin percent is increased by either paying less for inventory, or by selling it at a higher price. Inventory turnover can be increased by increasing sales (and cost of sales) without increasing average inventory or by reducing average inventory while holding sales and cost of sales constant. In sum, to increase overall return on inventory investment, it is not sufficient to just increase gross margin percent – inventory levels must also be controlled. ...
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This note was uploaded on 05/08/2011 for the course 193431918X 711 taught by Professor Braham during the Spring '11 term at Missouri (Mizzou).

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