If average inventory increases and cost of food sold stays the same, what happens to the inventory turnover rate?

If average inventory increases and cost of food sold stays the same, what happens to the inventory turnover rate?

• A. Increases
• B. Decreases
• C. Remains the same
• D. Becomes undefined

Answer: (B)

Inventory turnover rate shows how many times you sell through your average inventory in a period, and it’s calculated as cost of goods sold divided by average inventory. If the cost of goods sold stays the same but the average inventory goes up, you’re dividing the same sales by more stock, so the ratio falls. For example, with COGS of 500,000 and initial average inventory of 100,000, turnover is 5. If average inventory rises to 125,000 while COGS stays 500,000, turnover drops to 4. This means the inventory turnover rate decreases. The rate would not be undefined as long as COGS is positive, and it wouldn’t stay the same because the denominator has changed.

Inventory turnover rate shows how many times you sell through your average inventory in a period, and it’s calculated as cost of goods sold divided by average inventory. If the cost of goods sold stays the same but the average inventory goes up, you’re dividing the same sales by more stock, so the ratio falls. For example, with COGS of 500,000 and initial average inventory of 100,000, turnover is 5. If average inventory rises to 125,000 while COGS stays 500,000, turnover drops to 4. This means the inventory turnover rate decreases. The rate would not be undefined as long as COGS is positive, and it wouldn’t stay the same because the denominator has changed.