ABC Ltd has an average inventory of Rs. 20,000 at cost. If the Inventory Turnover Ratio is 8 times and the firm sells goods at a gross profit of 20% on sales. Calculate the gross profit of ABC Ltd.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs. 40,000
The inventory turnover ratio is worked on cost of revenue from operations, not on sales, so the cost comes first and sales are worked back from the profit margin.
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Cost of Revenue from Operations = 8 × Rs. 20,000 = Rs. 1,60,000
Gross profit 20% on sales, so cost = 80% of sales
Revenue from Operations = Rs. 1,60,000 × 100/80 = Rs. 2,00,000
Gross Profit = Rs. 2,00,000 − Rs. 1,60,000 = Rs. 40,000
Reading “20% on sales” as 20% on cost makes sales Rs. 1,92,000 and gives Rs. 32,000, the figure in Option (1).
Note: This question is from NCERT (2026-27). NTA sets numerical questions from NCERT too, so do not ignore NCERT while practising numericals.
NCERT (2026-27 edition):
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