Question

A trader carries an average inventory of Rs. 40,000. His inventory turnover ratio is 8 times. If he sells goods at a profit of 20% on Revenue from operations, find out the gross profit.

• A. Rs. 60,000
• B. Rs. 70,000
• C. Rs. 90,000
• D. Rs. 80,000

Hint:

Remember: If profit is given on Sales (Revenue), always adjust COGS as 100% – Profit%. Here, 20% profit → 80% COGS.

Answer 1

The Correct Option is A

Step 1: Formula for Inventory Turnover Ratio.
\[ \text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from Operations (COGS)}}{\text{Average Inventory}} \]

Step 2: Substitute values.
Inventory Turnover Ratio = 8.
Average Inventory = Rs. 40,000.
\[ 8 = \frac{COGS}{40,000} $\Rightarrow$ COGS = 8 \times 40,000 = Rs. 3,20,000 \]

Step 3: Revenue from operations.
If profit = 20% on Revenue, then: \[ \text{Gross Profit Ratio} = 20% \] Thus, COGS = 80% of Sales. \[ Sales = \frac{COGS}{0.80} = \frac{3,20,000}{0.80} = Rs. 4,00,000 \]

Step 4: Gross Profit.
\[ Gross Profit = Sales - COGS = 4,00,000 - 3,20,000 = Rs. 80,000 \] Wait — carefully: The question states "20% on Revenue from operations". That means: \[ Gross Profit = 20% \times 4,00,000 = Rs. 80,000 \]

Final Answer: \[ \boxed{\text{Rs. 80,000}} \]