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200,000 of sales on 40,000 of stock
Sales are 200,000. Cost of goods sold is 120,000. Inventory starts at 30,000 and ends at 50,000. Both inventory figures are at cost.
Revenue: 25% lower
Change revenue to 150,000 while keeping the other example values the same.
Revenue: 25% higher
Change revenue to 250,000 while keeping the other example values the same.
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Quick answer
What does the Gross margin return on inventory calculate?
How much gross profit does each dollar of inventory return? This calculator uses revenue, cost of goods sold, beginning inventory, and ending inventory to estimate gross profit per inventory dollar immediately in your browser.
With the values currently entered, the result is $2.00 — gross profit per inventory dollar. It also shows gross profit, gross margin, average inventory, and inventory turnover.
How to use the Gross margin return on inventory
- Replace the example values with your own numbers.
- Review the result and supporting figures as they update automatically.
- Check the formula and assumptions before using the estimate for a decision.
Inputs used
- Revenue
- Cost of goods sold
- Beginning inventory
- Ending inventory
Gross margin return on inventory formula
Gross profit = revenue − COGS. Average inventory = (beginning + ending) ÷ 2. GMROI = gross profit ÷ average inventory.
Assumptions
- IRS Publication 334 figures gross profit as receipts minus cost of goods sold. Investopedia defines GMROI as that profit divided by average inventory cost.
- Average inventory is the beginning balance plus the ending balance, divided by two. The SEC uses that average for inventory turnover. Keep both balances at cost.
Verify the inputs
Authoritative sources
These sources explain the definitions, factors, or rules behind this tool. Their geographic scope is shown because an official source for one country is not automatically valid somewhere else.
Defines GMROI as gross profit divided by average inventory cost. Gross profit is revenue minus the cost of goods sold.
Figuring gross profitUS Internal Revenue Service — Publication 334Scope: US Schedule C small-business tax guide; method is generalChapter 7 figures gross profit as net receipts minus cost of goods sold. It then tests accuracy as that profit divided by net receipts, compared with the markup policy.
Computation of ratiosUS Securities and Exchange CommissionScope: SEC-filed ratio definitions; method is generalWrites the current ratio as current assets divided by current liabilities, and inventory turnover as total cost of sales divided by average inventory (beginning plus ending, divided by two).
Sources do not endorse Calculum. Check the source date, scope, and your own documents before making a financial, tax, insurance, or reporting decision.
Practical guide
Gross margin return on inventory example and edge cases
Gross margin return on inventory is the gross profit you earn for each dollar in stock. IRS Publication 334 figures gross profit as receipts minus cost of goods sold. Investopedia divides that profit by average inventory cost. This page averages the beginning and ending inventory you type, which is the same average the SEC uses for inventory turnover.
Example: 200,000 of sales on 40,000 of stock
Sales are 200,000. Cost of goods sold is 120,000. Inventory starts at 30,000 and ends at 50,000. Both inventory figures are at cost.
- Revenue
- 200,000
- Cost of goods sold
- 120,000
- Beginning inventory
- 30,000
- Ending inventory
- 50,000
Calculated result$2.00gross profit per inventory dollar
Gross profit is 80,000, a 40 percent margin. Average inventory is 40,000, so GMROI is $2.00. Each inventory dollar returned 2 of gross profit. The same stock turns 3 times.
Example results use the default display profile. The calculator above follows your selected country and units.
How to read the result
- Read the dollars of gross profit per inventory dollar first. Then check the margin and the turnover. A high margin on a pile of stock that barely moves can still show a low GMROI.
- Both inventory boxes are at cost. A retail price in either box makes the average too high and the return too low.
Edge cases worth checking
A retail price is sitting in the inventory boxes
GMROI wants inventory at cost. If the 50,000 ending figure is what you would sell the goods for, the average is too high. Use the cost on the books.
A stockout month is missing from the two balances
Beginning and ending ignore a month when the shelf was empty. If stock swings hard inside the period, the two-point average can miss that dip. The turnover calculator uses this same average.
What changes the result most
Revenue
Use a current amount for revenue. Include fees or recurring costs that belong in the same figure.
Cost of goods sold
Use a current amount for cost of goods sold. Include fees or recurring costs that belong in the same figure.
Beginning inventory
Use a current amount for beginning inventory. Include fees or recurring costs that belong in the same figure.
Try a different scenario
Small changes show whether the answer is stable or sensitive.
Revenue: 25% lower
150,000$0.75gross profit per inventory dollar
Revenue: 25% higher
250,000$3.25gross profit per inventory dollar
Cost of goods sold: 25% higher
150,000$1.25gross profit per inventory dollar
Common mistakes
Check revenue
IRS Publication 334 figures gross profit as receipts minus cost of goods sold. Investopedia defines GMROI as that profit divided by average inventory cost. Make sure this matches the number you enter.
Keep ending inventory consistent
Average inventory is the beginning balance plus the ending balance, divided by two. The SEC uses that average for inventory turnover. Keep both balances at cost. Use the same units and time period throughout the calculation.
Do not rely on one gross margin return on inventory scenario
Run a cautious case and an optimistic case. The range is often more useful than one exact-looking number.
Use this result well
How much gross profit does each dollar of inventory return?
It does not replace a quote, contract, accountant, or local employment guidance.