Chapter 6, Problem 6.8BP

Use the inventory turnover retio end gross profit rabo to analyze companies (LO6–7)

Payless ShoeSource and Dillard’s both offer men’s formal footwear. Payless offers lower-to middle-priced footwear, whereas Dillard’s offers more specialized, higher-end footwear. The average price for a pair of shoes in Payless may be about $50, whereas the average price in Dillard’s may be about $175. The types of shoes offered by Dillard’s are not sold by many other stores. Suppose a Payless store and a Dillard’s store report the following amounts for men’s shoes in the same war (company names are disguised):

	Company 1	Company 2
Net sales	$200,000	$200,000
Cost of goods sold	130,000	165,000
Gross profit	$ 70,000	$ 35,000
Average inventory	$ 35,000	$ 20,000

  Required:

  1.    For Company 1 and Company 2, calculate the inventory turnover ratio.

  2.    For Company 1 and Company 2, calculate the gross profit ratio.

  3.    After comparing the inventory turnover ratios and gross profit ratios, which company do you think is Payless and which is Dillard’s? Explain.