Apparel Retailer A large catalog retailer of fashion apparel

(Apparel Retailer) A large catalog retailer of fashion apparel reported $100,000,000 in revenues over the last year. On average, over the same year, the company had $5,000,000 worth of inventory in their warehouses. Assume that units in inventory are valued based on cost of goods sold (COGS) and that the retailer has a 100 percent markup on all products.

a. How many times each year does the retailer turn its inventory?

b. The company uses a 40 percent per year cost of inventory. That is, for the hypothetical case that one item of $100 COGS would sit exactly one year in inventory, the company charges itself a $40 inventory cost. What is the inventory cost for a $30 (COGS) item? You may assume that inventory turns are independent of the price.

Solution

a.

Inventory turnover = cost of goods sold (COGS) / Average inventory

100% mark up on cost = sales of $100 million, Cost of goods sold = $50 million

                                = 50,000,000/5,000,000

                                = 10

Hence, the retailer has turned 10 times its inventory each year.

b.

Inventory cost for $30(COGS) item = $60