13 May 2023
Respt Sir During FY 21-22 firm purchased 1000 units of x item @ 80 Rs per unit ie total 80000 and sold 600 item @ 160 per unit during same FY, closing stock of 400units carried forward for next FY year ie 2022-23 valued at 40000 In FY 2022-23 firm sold 100 units @ 100 Rs per unit and balance 300 units valued at 30000 as closing stock now in FY 22-23 firms inventory turn over ratio = 0.28 which is less than 1 so whether do discontinued such item to buy being turnover ration is less than 1 Inventory Turnover ratio = COGS/Ave Stock please guide
09 July 2024
Based on the information provided, here's how you can analyze the inventory turnover ratio and decide on whether to discontinue the item:
1. **Calculate Inventory Turnover Ratio for FY 2022-23:** - Cost of Goods Sold (COGS) for FY 2022-23: - COGS = Opening Stock + Purchases - Closing Stock - Opening Stock (from FY 21-22) = Rs. 40,000 (400 units valued at Rs. 100 per unit) - Purchases = Nil (since no new purchases were mentioned) - Closing Stock (as of FY 22-23) = Rs. 30,000 (300 units valued at Rs. 100 per unit) - COGS = Rs. 40,000 + 0 - Rs. 30,000 = Rs. 10,000
- Average Stock for FY 2022-23: - Average Stock = (Opening Stock + Closing Stock) / 2 - Average Stock = (Rs. 40,000 + Rs. 30,000) / 2 = Rs. 35,000
- Inventory Turnover Ratio = COGS / Average Stock - Inventory Turnover Ratio = Rs. 10,000 / Rs. 35,000 - Inventory Turnover Ratio = 0.2857 (approximately)
2. **Interpretation of Inventory Turnover Ratio:** - An inventory turnover ratio of 0.28 indicates that, on average, the inventory is turned over 0.28 times during the financial year. This means the firm is selling and replacing its inventory less than once per year. - Generally, a low inventory turnover ratio (less than 1) suggests slow-moving inventory, which can tie up capital and warehouse space without generating sufficient sales.
3. **Decision on Discontinuation:** - While a turnover ratio of less than 1 suggests slower movement of inventory, the decision to discontinue the item should consider additional factors such as profitability, storage costs, demand trends, and potential obsolescence. - Evaluate if the item has a strategic importance or if it contributes sufficiently to overall sales and profitability despite the low turnover ratio. - Consider the cost implications of discontinuing the item, including any potential impact on customer satisfaction or sales of related products.
4. **Further Analysis and Action:** - Conduct a thorough analysis of the item's contribution to the firm's overall operations and profitability. - If the item is identified as slow-moving and unprofitable, explore options such as reducing purchase quantities, running promotions to clear existing stock, or phasing out the item gradually.
5. **Documentation and Review:** - Document the rationale behind the decision to discontinue or retain the item based on the inventory turnover analysis. - Regularly review inventory turnover ratios and make adjustments to inventory management strategies as needed to optimize working capital and profitability.
In conclusion, while a low inventory turnover ratio may indicate inefficiencies in inventory management, the decision to discontinue an item should be based on a holistic assessment of its contribution to overall business goals and profitability.
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