Question

The Tabor Sales Company had a gross profit margin (gross profits divided by sales) of 30.7 percent and sales of $9.4 million last year. Seventy-five percent of the firm's sales are on credit and the remainder are cash sales. Tabor's current assets equal $2.7 million, its current liabilities equal $283000 , and it has $98000 in cash plus marketable securities.

a. If Tabor's accounts receivable are $562500 , what is its average collection period?

b. If Tabor reduces its average collection period to 24 days, what will be its new level of accounts receivable?

c. Tabor's inventory turnover ratio is 9.5 times. What is the level of Tabor's inventories?

Answer 1

Gross profit margin = 30.7%

Gross profit / Sales = 30.7%

Gross profit = Sales * 30.7%

= $9,400,000 * 30.7%

= $2,885,800

Cost of goods sold = Sales - Gross profit

= $9,400,000 - $2,885,800

= $6,514,200

Credit sales = Sales * 75%

= $9,400,000 * 75%

= $7,050,000

a.

Accounts receivable turnover = Credit sales / Accounts receivable

= $7,050,000 / $562,500

= 12.53

Average collection period = 365 / Accounts receivable turnover

= 365 / 12.53

= 29 days

b.

Average collection period = 365 / Accounts receivable turnover

24 = 365 / Accounts receivable turnover

Accounts receivable turnover = 365 / 24

= 15.21

Accounts receivable turnover = Credit sales / Accounts receivable

15.21 = $7,050,000 /  Accounts receivable

Accounts receivable = $7,050,000 / 15.21

= $463,511

c.

Inventory turnover ratio = Cost of goods sold / Inventory

9.5 = $6,514,200 / Inventory

Inventory = $685,705