Question

Calculate the gross profit ratio and the inventory turnover ratio for the fiscal year ended February 3, 2018. Compare Target’s ratios with the industry averages of 24.5% and 7.1 times. Determine whether Target’s ratios indicate the company is more/less profitable and sells its inventory more/less frequently compared to the industry average.

Answer 1

Answer:

Target Corporation

a) Gross profit ratio = 28.4%

b) Inventory turnover ratio = 5.9 times

c) Indication: Target Corporation is more profitable at 28.4% gross margin ratio than the industry average of 24.5%.  But, it sells its inventory, 5.9 times in a year, which is less frequently than the industry average of 7.1 times.

Explanation:

a) Data and Calculations:

Target Corporation Financials for 2018:

Sales = $74,433 million

Cost of Sales = $53,299 million

Gross profit = $21,134 million ($74,433 - $53,299)

Beginning Inventory = $8,597 million

Ending Inventory = $9,497 million

b) Gross profit ratio = Gross profit/Sales * 100

= $21,134/$74,433 * 100

= 28.4%

c) Inventory turnover ratio = Cost of Sales/Average Inventory

= $53,299/$9,047

= 5.89

= 5.9 times

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

= ($8,597 + 9,497)/2

= $9,047 million