The Retail Inventory Method - Essay Example

The total amount of sales for the preceding period is also needed. With all these figures, it can be possible to determine a system that replenishes inventory frequently enough so that customer demand is met.

The computations go as follows:
1. Sales from the preceding period are subtracted from the retail value of the goods ready for sale. This is done to determine the number of goods on hand.
2. Next, the cost of the goods available for sale is divided by the retail goods available.
3. The value of the inventory in terms of retail is changed to the cost of the ending inventory by using the cost-to-retail ratio.

Once the cost of the ending inventory is determined, the potential amount of sales for the next period can be calculated. To make sure that the amount of inventory available never goes below 90%, periodic checks can be made to either increase or decrease the amount of inventory on hand. Read More