Question

The Brenmar Sales Company had a gross profit margin (gross profit/sales) of 28% and sales of $8.6 million last year. 70% of the firm’s sales are in credit, and the remainder are cash sales. Brenmar’s current assets equal $1.4 million, its current liabilities equal $299,000, and it has $106,000 in cash plus marketable securities.

A. If Brenmar’s accounts receivable equal $562,600, what is its average collection period?

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

C. Brenmar’s inventory turnover ratio is 8.8 times. What is the level of Brenmar’s inventories?

Answer 1

A

Credit sales = sales*credit% = 8600000*0.7=6020000

Receivables turnover = Credit sales/receivables

Receivables turnover = 6020000/562600

Receivables turnover = 10.7

days of sales outstanding = number of days in a year/receivables turnover

days of sales outstanding = 365/10.7

days of sales outstanding = 34.11

B

days of sales outstanding = number of days in a year/receivables turnover

25 = 365/Receivables turnover

Receivables turnover = 14.6

Receivables turnover = Credit sales/receivables

14.6 = 6020000/Receivables

Receivables = 412328.77

C

COGS = sales*(1-gross profit margin) = 8600000*(1-0.28)=6192000

days of inventory on hand = number of days in a year/inventory turnover

8.8 = 365/inventory turnover

inventory turnover = 41.48

Inventory turnover = COGS/inventory

41.4772727272727 = 6192000/Inventory

Inventory = 149286.58