A contractor maintains an average inventory of $45,000 in materials with an annual usage cost of $540,000. What is the inventory turnover ratio?
Correct Answer
C) 12
Inventory turnover ratio is calculated as Annual Usage Cost ÷ Average Inventory = $540,000 ÷ $45,000 = 12. This means the inventory turns over 12 times per year.
Why This Is the Correct Answer
The inventory turnover ratio is a financial metric that measures how efficiently a company uses its inventory by calculating how many times inventory is sold and replaced over a period. The formula is Annual Usage Cost (or Cost of Goods Sold) divided by Average Inventory. In this case, $540,000 ÷ $45,000 = 12, meaning the contractor completely turns over their inventory 12 times per year. This indicates the contractor cycles through their entire inventory stock once per month on average.
Why the Other Options Are Wrong
Option A: 0.083
This answer of 120 appears to be a decimal placement error, possibly multiplying the correct answer by 10 or miscalculating the division.
Option B: 120
This answer of 0.083 is the reciprocal of the correct answer, suggesting the formula was applied backwards (Average Inventory ÷ Annual Usage Cost instead of Annual Usage Cost ÷ Average Inventory).
Memory Technique
Remember 'TURN-UP': Turnover = Usage ÷ Average inventory. Think of it as 'how many times do I USE UP my average inventory per year?'
Reference Hint
Look up 'Financial Management' or 'Business and Finance' chapters, specifically sections on inventory management ratios and working capital analysis.
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