A trader carries an average inventory of Rs. 60,000. His inventory turnover ratio is 12 times. If he sells goods at a profit of 20% on revenue from operations, find out the gross profit.

Given Information:

• Average Inventory = Rs. 60,000
• Inventory Turnover Ratio = 12 times
• Profit = 20% on revenue from operations

Finding Cost of Revenue from Operations:

The formula for Inventory Turnover Ratio is:

$\text{Inventory Turnover Ratio} = \frac{\text{Cost of Revenue from Operations}}{\text{Average Inventory}}$

Substituting the values:

$12 = \frac{\text{Cost of Revenue from Operations}}{60,000}$

Cost of Revenue from Operations = 12 × 60,000 = Rs. 7,20,000

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Finding Revenue from Operations:

When profit is stated as 20% on revenue from operations, it means:

Gross Profit = 20% of Revenue from Operations

Let Revenue from Operations = $R$

The relationship is:

Revenue from Operations = Cost of Revenue from Operations + Gross Profit

$R = 7,20,000 + 0.20R$

$R - 0.20R = 7,20,000$

$0.80R = 7,20,000$

$R = \frac{7,20,000}{0.80} = 9,00,000$

Revenue from Operations = Rs. 9,00,000

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Calculating Gross Profit:

Gross Profit = 20% of Revenue from Operations

Gross Profit = $\frac{20}{100} \times 9,00,000$

Gross Profit = Rs. 1,80,000