Activity Ratios: Inventory Turnover and Days of Inventory on Hand (DOH)
An analyst gathers the following information.
| Item | Company A | Company B | Company C |
|----------------------|-----------|------------|------------|
| Average inventory | 1,100,000 | 1,300,000 | 2,900,000 |
| Total sales | 8,000,000 | 10,000,000 | 20,000,000 |
| Gross profit margin | 60% | 80% | 65% |
Which company _most likely_ exhibits the best inventory management as measured by the most common metric?
Correct.
Company A's inventory turnover is the highest at 2.9.
$$\displaystyle Company\:A\:cost\:of\:goods\:sold = (8,000,000)(1-0.60) = 3,200,000$$
$$\displaystyle Company\:A\:inventory\:turnover = \frac{3,200,000}{1,100,000} = 2.9$$
$$\displaystyle Company\:B\:inventory\:turnover = \frac{(10,000,000)(1-0.80)}{1,300,000} = 1.5$$
$$\displaystyle Company\:C\:inventory\:turnover = \frac{(20,000,000)(1-0.65)}{2,900,000} = 2.4$$
Incorrect.
Company B's gross profit margin is highest, but that is not the best measure of inventory management.
Incorrect.
Company C's sales are the highest, but that is not the best measure of inventory management.
Company A
Company B
Company C
