What is the formula used to calculate the average inventory level?

The average inventory level is a crucial metric in inventory management, as it helps a business determine how much inventory it typically holds over a period. To calculate the average inventory level accurately, the correct method is to divide the cost of goods sold (COGS) by the projected turn rate.

The projected turn rate indicates how often the inventory is expected to be sold and replaced over a specific time frame, typically a year. By taking the cost of goods sold, which reflects the total cost of goods that have been sold during that same time frame, and dividing it by the projected turn rate, you obtain an estimate of the average inventory that needs to be maintained to meet sales demands without overstocking or running out of stock.

This calculation is fundamental for effective inventory management and sales planning, and it aids in ensuring that a business can meet customer demand while also optimizing inventory levels to reduce holding costs.