A trader carries an average inventory of ₹40,000. His inventory turnover ratio is 8 times. If he sells goods at a profit of 20% on Revenue from operations, find out the gross profit.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 80,000
Inventory turnover ratio links cost of revenue from operations to average inventory. From the cost, the revenue is found using the profit margin on revenue, and gross profit is the difference.
Cost of revenue from operations = 8 × Rs. 40,000 = Rs. 3,20,000
Profit is 20% of revenue, so cost is 80% of revenue
Revenue from operations = Rs. 3,20,000 × 100/80 = Rs. 4,00,000
Gross profit = Rs. 4,00,000 − Rs. 3,20,000 = Rs. 80,000
Taking 20% of the cost (Rs. 64,000) is the common slip; the margin here is on revenue, not on cost.
NCERT (2026-27 edition):
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