Calculation of Inventory Turnover

Maximum Stock: 9000
Minimum Stock Level: 1200
Reorder Quantity: 7800
Order Level: 3000
Normal Consumption: 300 per day

1. Calculate the Average Inventory

The average inventory is calculated by adding the maximum and minimum stock levels and dividing by 2.

Average Inventory = (Maximum Stock + Minimum Stock Level) / 2
Average Inventory = (9000 + 1200) / 2
Average Inventory = 5100

2. Calculate the Cost of Goods Sold

The cost of goods sold can be calculated by multiplying the normal consumption by the number of days in a year.

Number of Days in a Year = 365
Cost of Goods Sold = Normal Consumption x Number of Days in a Year
Cost of Goods Sold = 300 x 365
Cost of Goods Sold = 109,500

3. Calculate the Inventory Turnover

The inventory turnover can be calculated by dividing the cost of goods sold by the average inventory.

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = 109,500 / 5100
Inventory Turnover = 21.47

Explanation

Inventory turnover is a financial ratio that measures how many times a company has sold and replaced its inventory during a given period. It is an important metric for businesses that deal with physical goods, as it helps them to manage their inventory levels and optimize their supply chain.

In this case, we have been given the maximum stock, minimum stock level, reorder quantity, order level, and normal consumption. We can use this information to calculate the inventory turnover for the company.

By calculating the average inventory, we get an idea of how much inventory the company has on average during the year. We then calculate the cost of goods sold by multiplying the normal consumption by the number of days in a year. Finally, we divide the cost of goods sold by the average inventory to get the inventory turnover ratio.

A high inventory turnover ratio indicates that a company is selling its inventory quickly and efficiently, while a low ratio may indicate that the company is holding too much inventory or is experiencing slow sales. In this case, the inventory turnover ratio is 21.47, which is a very good indicator for the company.