CPIM Practice Exam

If the inventory turnover ratio is 6 and the average inventory is $2.5 million, what is the annual cost of goods sold?

1. $2.4 million

2. $8.5 million

3. $12.5 million

4. $15 million

The correct answer is: $15 million

To understand how to find the annual cost of goods sold when given the inventory turnover ratio and average inventory, it's essential to grasp the relationship between these three values. The inventory turnover ratio is calculated using the formula: \[ \text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}} \] In this scenario, the inventory turnover ratio is 6, and the average inventory is $2.5 million. Substituting the known values into the formula allows us to isolate the cost of goods sold: \[ 6 = \frac{\text{COGS}}{2.5 \, \text{million}} \] To find COGS, multiply both sides of the equation by $2.5 million: \[ \text{COGS} = 6 \times 2.5\, \text{million} \] Calculating this gives: \[ \text{COGS} = 15 \, \text{million} \] Thus, the annual cost of goods sold is $15 million. This aligns with the logically derived conclusion based on the provided ratio and inventory figure, confirming that the answer is indeed correct. This understanding reinforces the importance