Question

The average inventory of AB Ltd. is ₹ 1,00,000 and the inventory turnover ratio is 6 times. Calculate the amount of revenue from operations if goods are sold at a profit of 25% on revenue from operations. 

Answer 1

Inventory Turnover Ratio = `"Cost of Revenue from Operations"/"Average Inventory"`

6 times = `"Cost of Revenue from Operations"/(1,00,000)`

Cost of Revenue from Operations = 6,00,000

If Revenue from Operations is 100, and Profit is 25

Thus Cost of Revenue from Operations is 100 − 25 = 75

∴ Revenue from Operations = `(6,00,000)/75 xx 100`

= ₹ 8,00,000