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M7-27 - E7-27 a Scenario 1 Scenario 2 Scenario 3 Scenario 4...

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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 6,000 12,000 6,000 6,000 (2) Average inventory $6,000 $6,000 $6,000 $5,000 (1) ÷ (2) Inventory Turnover 1 2 1 1.2 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.
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