Question

The Brenmar Sales Company had a gross profit margin​ (gross profits divided by ÷​sales) of 25 percent and sales of $ 9.5 million last year. 70 percent of the​ firm's sales are on​ credit, and the remainder are cash sales. ​ Brenmar's current assets equal $ 1.3 ​million, its current liabilities equal $298,600​, and it has $104,200 in cash plus marketable securities.

a. If​ Brenmar's accounts receivable equal $563,200​, what is its average collection​ period?

b. If Brenmar reduces its average collection period to 25 ​days, what will be its new level of accounts​ receivable?

c. Brenmar's inventory turnover ratio is 9.8 times. What is the level of​ Brenmar's inventories?

Answer 1

a.) Receivables Turnover = Credit Sales/Accounts Receivables = 6,650,000/563,200 = 11.81 times

Average Collection Period = 365/Receivables Turnover = 365/11.81 = 30.91 or approximately 31 days.

b.) Average Collection Period = 25 days = 365/Receivables Turnover

Receivables Turnover = 365/25 = 14.6 times

Receivables Turnover = Credit Sales/Accounts receivables = 6,650,000/Accounts receivables

Accounts receivables = 6,650,000/14.6 = $455,479.45 or $455,480 approximately.

c.) Gross profit margin = Gross profit/Sales

25% of sales = Gross profit

Gross profit = 9,500,000 x .25 = $2,375,000

COGS = Sales - Gross profit = 9,500,000 - 2,375,000 = $7,125,000

Inventory turnover = COGS/Inventory = 7125000/Inventory

Inventory = 7125000/9.8 = $727,040.82 or approximately $727,041

Please let me know in the comment section if you still have any doubts. Hope this helps :)