Wawa Food Markets is a convenience store chain located primarily in the Northeast. The company sells gas, candy bars, drinks, and other grocery-related items. St. Jude Medical Incorporated sells medical devices related to cardiovascular needs. Suppose a local Wawa Food Market and St. Jude sales office report the following amounts in the same year (company names are disguised): Company 1 Company 2 Net sales $ 400,000 $ 400,000 Cost of goods sold 180,000 330,000 Gross profit $ 220,000 $ 70,000 Average inventory $ 40,000 $ 30,000 Required: 1. For Company 1 and Company 2, calculate the inventory turnover ratio.

Inventory turnover ratio (Company 1) = 4.5 times

Inventory turnover ratio (Company 2) = 11 times

Explanation:

Given:

Particular                 Company 1      Company 2

Net sales                    $400,000      $ 400,000

Cost of goods sold    $180,000       $330,000

Gross profit                $220,000      $ 70,000

Average inventory     $40,000        $30,000

Computation of inventory turnover ratio.

Inventory turnover ratio = Cost of goods sold / Average inventory

Company 1

Inventory turnover ratio = $180,000 / 40,000

Inventory turnover ratio = 4.5 times

Company 2

Inventory turnover ratio = $330,000 / 30,000

Inventory turnover ratio = 11 times

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