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In business, Gross Margin Return on Inventory Investment (GMROII, also GMROI) [1] is a ratio which expresses a seller's return on every unit of currency spent on inventory. It is one way to determine how profitable the seller's inventory is, and describes the relationship between the profit earned from total sales, and the amount invested in the inventory sold. Generally for a seller, the higher the GMROII the better. Since inventory is a very widely ranging factor in a seller's investment in working capital, it is important for the seller to know how much he might expect to gain from it. The GMROII answers the question "for each unit of average inventory held at cost, how many units of currency of gross profit I generated in one year?" GMROII is traditionally calculated by using one year's gross profit against the average of 12 or 13 units of inventory at cost. GMROII may vary depending on which segment we are analyzing (Women's Apparel, Toys, Home, Sport Ware, etc.), but a rule of thumb is that a GMROII of typical retailer is above 3.0. [2]
GMROII is particularly important in the retail industry, [1] where stock turn (i.e. sales units divided by average inventory units) and Gross Margin Percent can vary heavily by item, market segment, location, and period. GMROII can act as the main driver for retailers to analyze their product and store offering. This metric does not suffer from the major disadvantages some of the other main performance metrics do.
For example:
Retailers usually drive their business based on sales or margin. In a retailer where budgets and bonuses are based on sales, employees often achieve that by lowering the margin or putting too much stock in their stores. A high GMROII indicates a good balance of sales, margin, and inventory cost.
Financial textbooks often show a formula with a yearly or monthly calculation. When tactical decisions are required for variable time periods, it is helpful for systems to be set up so that GMROII can be analyzed at either the yearly, monthly, or weekly level. Due to the textbook GMROII formula, depending on the time period, a different result would occur.
For example:
Therefore, it is advantageous to use Average Weekly GMROII which takes time out of the picture. That way, the retailer looks at similar types of numbers regardless of how many weeks are being looked at. The formula is: Average Weekly GMROII = (Profits for the total time period) / (Sum of week ending inventory cost value)
Other formulas that are often given for GMROII are the following (note that all of these are mathematically equivalent because all can be reduced down to Margin/Avg_Inventory_cost):
In the formulas used here, "Margin %" refers to margin as a percent of sales, "Annual Inventory Turns" refers to COGS / Avg Inventory Cost.
American Levi's GMROII [3] is a hybrid of GMROII and GMROS (Gross Margin Return On Space) that takes the selling price of an article into account:
When deciding whether to stock jeans in a retail store, it makes more sense for Levi's to sell jeans for $100 rather than jeans for $10, if they both have the same conventional GMROII. By using the American Levi's GMROII, you see that the $100 jeans deliver 10 times the margin dollars on the space occupied by each pair of jeans in stock, compared to the $10 jeans. Net Profit will increase more than 10 times due to operating leverage.
Note that GMROS can be calculated by multiplying American Levi's GMROII by Density (Units per square foot). Gross Margin Dollars per Square Foot:
A short-coming of GMROII-driven analysis is that items with high sell-offs (i.e. the final stock level falls towards zero) appear better than items with constant inventory supplies. Fashionable items that totally sold off will appear better than basic items such as black socks that are replenished by reorders. This is particularly evident when analyzing shorter time periods or item level information rather than higher level (department) information.
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit. In neoclassical economics, which is currently the mainstream approach to microeconomics, the firm is assumed to be a "rational agent" which wants to maximize its total profit, which is the difference between its total revenue and its total cost.
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.
An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.
Economic order quantity (EOQ), also known as financial purchase quantity or economic buying quantity, is the order quantity that minimizes the total holding costs and ordering costs in inventory management. It is one of the oldest classical production scheduling models. The model was developed by Ford W. Harris in 1913, but the consultant R. H. Wilson applied it extensively, and he and K. Andler are given credit for their in-depth analysis.
In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.
Gross margin is the difference between revenue and cost of goods sold (COGS), divided by revenue. Gross margin is expressed as a percentage. Generally, it is calculated as the selling price of an item, less the cost of goods sold, then divided by the same selling price. "Gross margin" is often used interchangeably with "gross profit", however, the terms are different: "gross profit" is technically an absolute monetary amount, and "gross margin" is technically a percentage or ratio.
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Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts caused by uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against stockouts.
The economic lot scheduling problem (ELSP) is a problem in operations management and inventory theory that has been studied by many researchers for more than 50 years. The term was first used in 1958 by professor Jack D. Rogers of Berkeley, who extended the economic order quantity model to the case where there are several products to be produced on the same machine, so that one must decide both the lot size for each product and when each lot should be produced. The method illustrated by Jack D. Rogers draws on a 1956 paper from Welch, W. Evert. The ELSP is a mathematical model of a common issue for almost any company or industry: planning what to manufacture, when to manufacture and how much to manufacture.
In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows which the investor receives from that investment over a specified time period, such as interest payments, coupons, cash dividends and stock dividends. It may be measured either in absolute terms or as a percentage of the amount invested. The latter is also called the holding period return.
The economic production quantity model determines the quantity a company or retailer should order to minimize the total inventory costs by balancing the inventory holding cost and average fixed ordering cost. The EPQ model was developed and published by E. W. Taft, a statistical engineer working at Winchester Repeating Arms Company in New Haven, Connecticut, in 1918.
In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, merchandise turnover, stockturn, stock turns, turns, and stock turnover.
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Days in inventory is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. The ratio measures the number of days funds are tied up in inventory. Inventory levels are divided by sales per day
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The Common Consolidated Corporate Tax Base (CCCTB) is a proposal for a common tax scheme for the European Union developed by the European Commission and first proposed in March 2011 that provides a single set of rules for how EU corporations calculate EU taxes, and provide the ability to consolidate EU taxes. Corporate tax rates in the EU would not be changed by the CCCTB, as EU countries would continue to have their own corporate tax rates.
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The UVA method is an accounting and decision-making tool, based on calculating the cost of sales. Unlike management accounting, which calculates product margins, the UVA method calculates the result generated by each sale. The UVA method relies on a very detailed analysis of all costs related to products, customers, orders, and deliveries. It introduces the notion of a single measure unit, which applies to all the operations in the company. The method relies on an equivalent-based approach.