You maintain an average inventory of $75,000 in materials with an annual usage of $450,000. What is your inventory turnover ratio?
Correct Answer
B) 6 times per year
Inventory turnover ratio = Annual usage ÷ Average inventory = $450,000 ÷ $75,000 = 6 times per year. This indicates how many times the inventory is completely used and replenished annually.
Why This Is the Correct Answer
The inventory turnover ratio is calculated by dividing annual usage by average inventory. Using the formula: $450,000 ÷ $75,000 = 6. This means the contractor completely uses and replaces their entire inventory 6 times per year. A turnover ratio of 6 indicates efficient inventory management, as materials are moving through the business regularly without excessive stockpiling.
Why the Other Options Are Wrong
Option C: 9 times per year
This would result from incorrectly calculating $675,000 ÷ $75,000 or inflating the annual usage by 1.5 times, which doesn't match the given data.
Option D: 3 times per year
This would result from incorrectly calculating $225,000 ÷ $75,000 or using half the annual usage figure, which is not the correct formula application.
Memory Technique
Think 'TURN = Usage ÷ Inventory' - the word TURN helps remember you're calculating how many times inventory 'turns over' by dividing usage by inventory amount.
Reference Hint
Look up 'Financial Management' or 'Business Operations' chapter, specifically sections on inventory management ratios and working capital analysis.
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