Your company is managing inventory for a large commercial project. The current inventory value is $150,000, and monthly material usage averages $50,000. What is the inventory turnover ratio?
Correct Answer
D) 12.0
Inventory turnover ratio is calculated as annual usage divided by average inventory. Monthly usage of $50,000 × 12 months = $600,000 annual usage. $600,000 ÷ $150,000 inventory = 4.0 turnover ratio per year, or 12.0 times annually.
Why This Is the Correct Answer
Inventory turnover ratio is calculated as annual usage divided by average inventory. Monthly usage of $50,000 × 12 months = $600,000 annual usage. $600,000 ÷ $150,000 inventory = 4.0 turnover ratio per year, or 12.0 times annually.
Why the Other Options Are Wrong
Option A: 3.0
This represents the inverse calculation (inventory ÷ annual usage = $150,000 ÷ $600,000 = 0.25, close to 0.33). This would indicate how much of a year's worth of inventory you have on hand, not the turnover ratio.
Option B: 0.33
This appears to be monthly usage divided by inventory ($50,000 ÷ $150,000 = 0.33), then possibly multiplied by 9, which is not the correct formula for inventory turnover ratio.
Option C: 36.0
This might result from multiplying monthly usage by 12 months, then dividing by monthly inventory equivalent, but uses an incorrect calculation method that inflates the turnover ratio.
Memory Technique
Remember 'TURN-over' - you TURN monthly into yearly (×12), then turn it OVER the inventory value (÷). Higher ratios mean faster inventory movement.
Reference Hint
Construction accounting and project management chapters, specifically sections on inventory management and financial ratios
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