Question

Assume Mountain Activewear Inc. made sales of $973.8 million during 2020 . Cost of goods sold for the year totalled $661.8 million. At the end of 2019 , Mountain's inventory stood at $204.2 million, and Mountain ended 2020 with inventory of $244 million. Compute Mountain's gross profit percentage and rate of inventory turnover for 2020 . Assume the industry average is 35% for the gross profit percentage and 2.9 times for the inventory turnover. How do the company's ratios compare to the industry averages

Answer 1

Mountain Activewear Inc.'s gross profit percentage for 2020 is 32.04%, which is slightly below the industry average of 35%. The rate of inventory turnover is 2.95 times, marginally above the industry average of 2.9 times.

Step-by-step explanation:

To calculate Mountain Activewear Inc.'s gross profit percentage and rate of inventory turnover for 2020, we will use the given sales and cost data.

Gross Profit Percentage Calculation

Gross Profit = Sales - Cost of Goods Sold

Gross Profit = $973.8 million - $661.8 million

Gross Profit = $312 million

Gross Profit Percentage = (Gross Profit / Sales) × 100%

Gross Profit Percentage = ($312 million / $973.8 million) × 100%

Gross Profit Percentage = 32.04%

The gross profit percentage of Mountain Activewear is slightly below the industry average of 35%.

Rate of Inventory Turnover Calculation

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Average Inventory = ($204.2 million + $244 million) / 2

Average Inventory = $224.1 million

Inventory Turnover = Cost of Goods Sold / Average Inventory

Inventory Turnover = $661.8 million / $224.1 million

Inventory Turnover = 2.95 times

The rate of inventory turnover for Mountain Activewear is just above the industry average of 2.9 times.