A trading firm’s average stock is Rs. 20,000 (cost). If the stock turnover ratio is 8 times and the firm sells goods at a profit of 20% on sales, ascertain the profit of the firm.

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Solution

$S t o c k t u r n o v e r R a t i o = \frac{C o s t o f G o o d s S o l d}{A v e r a g e s t o c k} 8 = \frac{C o s t o f G o o d s S o l d}{20, 000} C o s t o f G o o d s S o l d = R s . 20, 000 \times 8 = R s . 1, 60, 000$

Let sale price be Rs. 100, then profit is Rs. 20.
Hence, the Cost of Goods Sold = 100 – 20 = 80
If the Cost of Goods Sold is 80 then Sales = 100
If the Cost of Goods sold is Rs. 1, then Sales $= \frac{100}{80}$
If the Cost of Goods sold is Rs. 1,60,000,
then Sales $= \frac{100}{80} \times 1, 60, 000 = R s . 2, 00, 000$

Profit = Sales – Cost of Goods Sold
= Rs. 2,00,000 – Rs. 1,60,000 = Rs. 40,000

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