Each pallet of your product in the warehouse of your distributor holds $5,000 of product at the distributor's cost of goods, which he sells at a gross margin of 10% to industrial plants. The distributor sells 120 pallets each year to his customers, and the distributor carries 3 months inventory of your product at all times. What is the annual ROI on the value of the monthly inventory he carries of your product?
Hint on Return: Remember, that if the distributor's gross margin is 10% of the selling price (by definition), then his cost of goods is 90% of the selling price (by definition). The selling price less the cost of goods would be the return (profit) per pallet, and he sells 120 pallets over a period of one year.
Hint on Investment: Remember that the distributor carries 3 months of inventory all year long. If he sells 120 pallets per year, then he sells 10 pallets per month, and essentially carries 30 pallets of inventory all year as his investment.
1. Identify unknowns
2. Show relationships
3. Connect with formulas
4. Solve the problem