Which statement best explains why faster stock turnover can increase profitability?

Which statement best explains why faster stock turnover can increase profitability?

• A. Each sale earns a markup and more turnover multiplies profit.
• B. The markup per unit decreases as turnover increases.
• C. There is no effect on profitability.
• D. Higher turnover increases stock holding costs.

Answer: (A)

Stock turnover affects profitability by turning inventory into sales more quickly, so the total gross profit earned in a period depends on how many units you sell. If the markup on each sale stays the same, selling more units in the same time frame means you realize that same profit on each sale more often, which increases overall profit. In other words, faster turnover multiplies the profit from each sale across a higher volume. The idea that the per-unit markup would automatically fall as turnover rises isn’t a given and isn’t needed for the profitability gain. There is indeed an impact on profitability from higher turnover, and while holding costs can be affected, the primary effect is the greater total gross profit from more frequent sales.

Stock turnover affects profitability by turning inventory into sales more quickly, so the total gross profit earned in a period depends on how many units you sell. If the markup on each sale stays the same, selling more units in the same time frame means you realize that same profit on each sale more often, which increases overall profit. In other words, faster turnover multiplies the profit from each sale across a higher volume. The idea that the per-unit markup would automatically fall as turnover rises isn’t a given and isn’t needed for the profitability gain. There is indeed an impact on profitability from higher turnover, and while holding costs can be affected, the primary effect is the greater total gross profit from more frequent sales.