Question

(Efficiency analysis)  The Brenmar Sales Company had a gross profit margin​ (gross profits divided by÷sales) of 27 percent and sales of $8.4 million last year. 78 percent of the firm's sales are on credit, and the remainder are cash sales. Brenmar's current assets equal 1.8 million, its current liabilities equal $297,500, and it has $109,000 in cash marketable securities.

A. If​ Brenmar's accounts receivable equal $562,500, what is its average collection period?

b. If Brenmar reduces its average collection period to 20 ​days, what will be its new level of accounts​ receivable?

c. Brenmar's inventory turnover ratio is 8.2 times. What is the level of​ Brenmar's inventories?

a. If​ Brenmar's accounts receivable equal $562,500​, what is its average collection​ period?

The​ company's average collection period will be _ days. ​(Round to two decimal​ places.)

Answer 1

Given,

Gross profit margin = 27%

Sales = $8.4 million or $8400000

Credit sales rate = 78%

Solution :-

Credit sales = Sales x credit sales rate

= $8400000 x 78% = $6552000

(a)

Accounts receivables = $562500

Average collection period = Accounts receivables (credit sales/365 days)

= $562500 ($6552000/365 days)

= $562500 $17950.6849315 = 31.34 days

(b)

Average collection period = 20 days

Accounts receivables = credit sales/365 days x average collection period

= $6552000/365 days x 20 days = $359013.70

(c)

Inventory turnover ratio = 8.2

Gross profit = sales x gross profit margin

= $8400000 x 27% = $2268000

Cost of goods sold = sales - gross profit

= $8400000 - $2268000 = $6132000

Inventories = cost of goods sold inventory turnover ratio

= $6132000 8.2 = $747804.88