Relationship Between the Average Inventory at Cost And Gross Margin

Question Description

Gross Margin Return on Investment (GMROI) GMROI is the relationship between the average inventory at cost and gross margin. GMROI is used to analyze a retailer’s inventory and incorporate how fast inventory sells and translates its profits into a single measure.

GMROI = (gross margin dollars / net sales) * (net sales / average inventory) or GMROI = gross margin dollars / average inventory Calculating GMROI is a quick and easy way to measure how fast a business is producing and how well it is using its investment in inventory, which should be the driving force to manage your inventory daily. Again, GMROI relates sales and the cash those sales are generating.

Profitable sales growth provides the cash that a business needs to survive and grow. If a business does not produce enough cash, it will fail. GMROI simply means if a retailer spends a dollar for merchandise to sell in the store, he or she must calculate how much money is needed for the business to remain viable (Clodfelter, 2002).

A business’s mission should be a minimum-dollar investment and should produce a maximum amount of gross margin. In the current business atmosphere, how would you apply this concept to ensure the shareholders made a profit?