Calculate average inventory from COGS and turnover ratio Steps:

• Gross margin of 20% means COGS is 80% of revenue: 0.80 × $25,000 =$20,000 (note: revenue likely $25,000 to match options).
• Inventory turnover ratio = COGS ÷ average inventory.
• Turnover of 5 = $20,000 ÷ average inventory.
• Average inventory = $20,000 ÷ 5 =$4,000.

Why C is correct:

• $4,000 equals COGS divided by the given turnover ratio of 5, per the standard inventory turnover formula.

Why the others are wrong:

• A. $1,000: Results from using gross profit ($5,000) instead of COGS in the formula.
• B. $3,500: Does not align with any standard calculation from the given data.
• D. $5,000: Results from dividing revenue by 5, ignoring the need for COGS.

Final answer: C