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.

₹80,000

The correct answer is option 4- ₹80,000.

Average inventory = ₹40,000.
Inventory turnover ratio = 8 times

Inventory turnover ratio = Cost of Revenue from operations/Average inventory
                                 8 = Cost of Revenue from operations/40,000
Cost of Revenue from operations = 8 x 40,000
                                                = 3,20,000

Goods sold at a profit of 20% on Revenue from operations.

Gross profit = Revenue from operations - Cost of Revenue from operations

Cost of goods sold = 3,20,000
Gross profit is 20% on sales

Let Revenue from operations = x
Gross profit = 20% of x i.e. x/5

Cost of Revenue from operations + gross profit = Revenue from operations
3,20,000 + x/5 = x
x - x/5 = 3,20,000
4x/5 = 3,20,000
x = 3,20,000 x 5/4
   = 4,00,000

Sales = 4,00,000

Gross profit = 4,00,000/5
                  = 80,000