Questions
Question 1
Inventory turnover shows the number of times inventory cycles in a given time span. It evaluates effectiveness by which a retailer utilizes investment in its inventory. It is computed by dividing sales with the average inventory or by diving the cost of goods sold with the average inventory.
Asset turnover show the number of times assets are used to generate sales. It is computed by dividing sales with the total assets.
They are appropriate for measuring productivity because they give direct measures of how effective the retailer uses its assets in its operations. However, they give very little information on other aspects of the retailer’s business such as profitability or cash flows. Therefore, they are inappropriate for other areas of operation. There are other ratios that ca adequately measure those other areas.
Question 2
Neiman Marcus should have a higher gross margin than Wal-Mart because Neiman Marcus offers high service that target high net-worth individuals hence it can charge a high price for its goods. Wal-Mart has to charge lower prices to attract customers from all segments. Consequently, Neiman Marcus has a higher net profit margin compared to Wal-Mart.
Wal-Mart has a higher expense to sales ratio because it has to charge relatively lower prices for similar goods compared to Neiman Marcus yet the expenses incurred by both stores are almost the same.
Wal-Mart should have a higher inventory turnover compared to Neiman Marcus. Wal-Mart targets all customer segments hence it has a higher consumer traffic in its stores compared to Neiman Marcus. Consequently, Wal-Mart also has a high asset turnover compared to Neiman Marcus.
