The following example explains the relationship between the Gross Margin Return On Investment (GMROI) and the adjusted margin percent.
On January 1st, you buy a water heater from a vendor for $500.00 and on March 3rd, with a markup of 30%, you sell it for $650.00 ($500.00 + (.3 * 500)). This purchase-markup-sell cycle “turns” the inventory one time. Of that $650.00, you use $500.00 to purchase another water heater and retain $150.00 as your gross profit.
If you repeat this scenario three more times during the year. In this time:
You turn the inventory four times.
Your total cost of goods sold (COGS) is $2000.00 (4 * $500.00).
With a 30% markup, your total sales is $2600.00 (4 * (.3 * $500.00)) and your total gross profit is $600.00 (4 * $150.00).
If you never keep more than one water heater on the shelf at a time, your average inventory investment is $500.00.
With a total gross profit of $600.00 on an average $500.00 inventory investment, your GMROI is 120% ($600.00 / $500.00).
If you had only turned this product three times during the year, your GMROI would be 90%. Consider that:
Your total cost of goods sold (COGS) is $1500.00 (3 * $500.00).
Your total sales is $1950.00 (3 * $650.00).
Your total gross profit is $450.00 (3 * $150.00).
Your average inventory investment is $500.00.
Total gross profit divided by average inventory investment yields GMROI: 90% = ($450.00 / $500.00).
The following table shows illustrates how the GMROI and Adjusted Margin Percent are calculated.
|
|
Date |
Action |
Purchase Price |
Sale Price |
COGS |
Gross Profit |
|
Turn 1 |
1/1/00 |
Buy 1 heater |
$500 |
|
|
|
|
3/10/00 |
Sell 1 heater |
|
$650 |
$500 |
$150 |
|
|
Turn 2 |
3/11/00 |
Buy 1 heater |
$500 |
|
|
|
|
9/5/00 |
Sell 1 heater |
|
$650 |
$500 |
$150 |
|
|
Turn 3 |
9/6/00 |
Buy 1 heater |
$500 |
|
|
|
|
10/9/00 |
Sell 1 heater |
|
$650 |
$500 |
$150 |
|
|
Turn 4 |
10/10/00 |
Buy 1 heater |
$500 |
|
|
|
|
11/15/00 |
Sell 1 heater |
|
$650 |
$500 |
$150 |
|
|
Total Turns |
|
|
|
Gross Sales |
Total Cost of Goods Sold |
Gross Profit |
|
4 |
|
|
|
$2600 |
$2000 |
$600 |
|
GMROI = (Turnover * Markup percentage for 365-Day Period) Turnover = (Total COGS for Product in 365 days / Avg $ On-Hand Cost) Avg $ On-Hand Cost = (Cost * Avg On-Hand Quantity) [The Cost used as a multiplier is the value defined in the Cost Basis field on the report entry screen.] |
120 = (4 * 30) 4 = ($2000 / $500) $500 = ($500 * 1) |
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Adjusted Margin % = (Adjusted Gross Profit $ / Sales $) Adjusted Gross Profit $ = (Actual Gross Profit $ - Carrying Cost $) Carrying Cost $ = (Avg $ On-Hand * Carrying Cost %) |
17.15% = ($460 / $2600) $460 = ($600 - $140) $140 = ($500 * 28%) |
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See Also:
Gross Margin Return On Investment (GMROI) Overview
How the System Calculates Gross Margin Return On Investment (GMROI)