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 :)*

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