Learn how to calculate inventory turnover ratio with the inventory turns formula. Understand what inventory turnover measures and see an example calculation.
Table of Contents
Question
A company sells 60 units of product in a given year and has an average quantity on hand of 10 units. What is the inventory turns ratio?
A. 0.16
B. 6
C. 60
D. 600
Answer
B. 6
Explanation
To calculate the inventory turnover ratio, use this formula:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Where:
Cost of Goods Sold (COGS) = Number of units sold
Average Inventory = Average quantity of inventory on hand
In this example:
- The company sold 60 units of product in the year. This is the Cost of Goods Sold.
- The average quantity of inventory on hand is 10 units. This is the Average Inventory.
Plugging the numbers into the formula:
Inventory Turnover Ratio
= 60 units sold / 10 units average inventory
= 6
Therefore, the correct answer is B. The inventory turnover ratio is 6.
This means the company is “turning over” or selling its entire average inventory 6 times per year. A higher ratio generally indicates more efficient inventory management, while a lower ratio suggests the company may be overstocking inventory or having difficulty selling products. The ideal ratio varies by industry.
The other answer choices are incorrect:
A. 0.16 would be the result of inverting the formula (10/60).
C. 60 is the COGS but not the final ratio.
D. 600 does not make sense based on the given information.
APICS CSCP certification exam practice question and answer (Q&A) dump with detail explanation and reference available free, helpful to pass the APICS CSCP exam and earn APICS CSCP certification.