Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e

Back Matter Appendix B: Marketing

Arithmetic

© The McGraw−Hill

Companies, 2002

Marketing Arithmetic 675

A detailed operating statement can provide the data needed to compute the

stockturn rate—a measure of the number of times the average inventory is sold dur-

ing a year. Note that the stockturn rate is related to the turnover during a year,not

the length of time covered by a particular operating statement.

The stockturn rate is a very important measure because it shows how rapidly the

firm’s inventory is moving. Some businesses typically have slower turnover than oth-

ers. But a drop in turnover in a particular business can be very alarming. It may

mean that the firm’s assortment of products is no longer as attractive as it was. Also,

it may mean that the firm will need more working capital to handle the same vol-

ume of sales. Most businesses pay a lot of attention to the stockturn rate—trying

to get faster turnover (and lower inventory costs).

Three methods—all basically similar—can be used to compute the stockturn

rate. Which method is used depends on the data available. These three methods,

which usually give approximately the same results, are shown below.*

(1) Cost of sales

Average inventory at cost

(2) Net sales

Average inventory at selling price

(3) Sales in units

Average inventory in units

Computing the stockturn rate will be illustrated only for Formula 1, since all are

similar. The only difference is that the cost figures used in Formula 1 are changed

to a selling price or numerical count basis in Formulas 2 and 3. Note: Regardless of

the method used, you must have both the numerator and denominator of the for-

mula in the same terms.

If the inventory level varies a lot during the year, you may need detailed informa-

tion about the inventory level at different times to compute the average inventory. If

it stays at about the same level during the year, however, it’s easy to get an estimate.

For example, using Formula 1, the average inventory at cost is computed by adding the

beginning and ending inventories at cost and dividing by 2. This average inventory

figure is then divided into the cost of sales (in cost terms) to get the stockturn rate.

For example, suppose that the cost of sales for one year was $1,000,000. Begin-

ning inventory was $250,000 and ending inventory $150,000. Adding the two

inventory figures and dividing by 2, we get an average inventory of $200,000. We

next divide the cost of sales by the average inventory ($1,000,000 $200,000) and

get a stockturn rate of 5. The stockturn rate is covered further in Chapter 18.

Computing the Stockturn Rate

Operating Ratios Help Analyze the Business

Many businesspeople use the operating statement to calculate operating ratios—

the ratio of items on the operating statement to net sales—and to compare these

ratios from one time period to another. They can also compare their own operating

*Differences occur because of varied markups and nonhomogeneous product assortments. In an assort-

ment of tires, for example, those with low markups might have sold much better than those with high

markups. But with Formula 3, all tires would be treated equally.