Question

The following accounting information pertains to two grocery store chains. One grocery store chain has a market strategy of selling
only high end organic food products while the other grocery store sells less expensive foods that are traditionally grown with the use
of pesticides, synthetic fertilizers, and/or genetically modified organisms.
The company selling traditional produced foods has an average inventory balance of $45,000, while the company selling organic
foods has an average inventory balance of $40,000.
a. Complete the table by filling in the missing amounts.
b. Which grocery store chain is taking a lower cost/higher volume strategy as it relates to sales?
c1. Calculate the inventory turnover and average days to sell inventory for each grocery store chain.
c2. Based on your calculations, which grocery chain will be required to reorder inventory more frequently?

Answer 1

a. Completion Table is as follows:

                                   Company A  Company B

                                   (Traditional)   (Organic)

Sales Revenue            $600,000        $500,000  

Cost of goods sold     $390,000        $300,000  

Gross Profit                 $210,000        $200,000  

Gross profit percentage    35%                 40%

b. Company B (organic company) employs a lower cost/higher volume strategy because its cost of goods sold represents only 60% of the sales revenue, whereas, the Company A's (traditional company) cost of goods sold represents 65% of its sales revenue.

c1. The Inventory Turnover Ratios and Average Days to Sell Inventory are as follows:

                         Inventory Turnover Ratios  Average days to sell inventory

Company A (Traditional)      8.7 times                                     42 days

Company B (Organic)          7.5 times                                    49 days

c2. Based on the calculations, the Traditional Grocery Chain will be required to reorder inventory more frequently than the Organic Grocery Chain.

Data and Calculations:

                                   Company A  Company B

                                   (Traditional)   (Organic)

Sales Revenue            $600,000        $500,000  

Cost of goods sold     $390,000        $300,000  

Gross Profit                 $210,000        $200,000  

Gross profit percentage    35%                 40%

Average Inventory       $45,000           $40,000

Gross margin for Traditional Company = $210,000 ($600,000 x 35%)

Cost of goods sold = $390,000 ($600,000 - $210,000)

Gross Profit or Margin percentage for the Organic Company = 40% ($200,000/$500,000 x 100)

Inventory Turnover ratio = Cost of goods sold/Average Inventory

Company A (Traditional) = 8.7 times ($390,000/$45,000)

Company B (Organic) = 7.5 times ($300,000/$40,000)

Average days to sell inventory = 365/Inventory Turnover ratio

Company A (Traditional) = 42 days (365/8.7)

Company B (Organic) = 49 days (365/7.5)

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