To calculate the inventory turnover ratio for 2020, two pieces of information are needed: the cost of goods sold (COGS) for 2020 and the average inventory for 2020. The inventory turnover ratio measures a company's efficiency in managing inventory by showing how many times it sells and replaces inventory. The formula for the inventory turnover ratio is COGS / Average Inventory. To calculate the gross margin return on inventory investment for 2020, the formula is: Gross Margin Return on Inventory Investment = Gross Margin / Average Inventory.
For example, if COGS for 2020 is $500,000 and the average inventory is $100,000, the inventory turnover ratio is calculated as Inventory Turnover Ratio = 5 / $100,000 = 5. The gross margin return on inventory investment is calculated as Gross Margin Return on Inventory Investment = $200,000 / $100,000 = 2. For every dollar invested in inventory, Thomas Inc. generated $2 in gross margin during 2020. It is important to use the specific data provided to obtain accurate ratios.