The efficiency of an inventory system is often measured by the turnover ratio.(TR), defined by TR =
Question:
The efficiency of an inventory system is often measured by the turnover ratio.(TR), defined by TR = Cost of goods sold per year / Average value of on hand inventory
a. Does a high turnover ratio indicate an efficient inventory system?
b. If the EOQ model is being used, determine TR in terms of K, D, h, and Q.
c. Suppose that D increases. Show that TR will also increase. Does this make intuitive sense?
Step by Step Answer:
Turnover ratio a Yes a large turnover ratio indicates that the average amount of ...View the full answer
Related Video
Inventory turnover is a key metric that helps businesses evaluate the efficiency of their operations. A high turnover ratio is generally considered positive, indicating that the company is effectively selling its inventory and making efficient use of its resources. On the other hand, a low turnover ratio may indicate issues such as overstocking or slow sales and may require further examination to identify and address the underlying causes. Businesses use this ratio to make decisions about inventory levels, production schedules, and pricing strategies. It also helps businesses to identify areas where they may need to make improvements, such as reducing lead times for production or optimizing sales and marketing efforts. Additionally, inventory turnover is used by investors and analysts as a key performance indicator to evaluate the financial health and growth potential of a company.
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