Measuring Marketing

Chapter 84 Gross Margin Return on Inventory Investment

Measurement Need

To measure the products with the highest return on inventory investment.

Solutioni

Gross margin return on inventory investment (GMROII) measures how successfully a retailer has invested its money used for inventory. More simply, it is a measure of an item’s gross profitability. It is calculated using this formula:

$GMROII=\frac{M}{C_{ai}}$

Where

GMROII = gross margin return on inventory investment

M = gross margin dollars

Cai = average inventory costs in dollars

Let’s assume that a sporting goods retail chain is earning gross margins of $3 million. Average inventory at cost is $1 million. Therefore, the GMROII is $3:

$\begin{array}{l}GMROII=\frac{\$3,000,000}{\$1,000,000}\\ \end{array}$