Question

The Brenmar Sales Company had a gross profit margin (gross profits divided by ÷ sales) of 26 percent and sales of $9.3 million last year. 79 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 $ 303,500, and it has $104,100 in cash plus marketable securities. a. If Brenmar's accounts receivable equal $563,000 , what is its average collection period? b. If Brenmar reduces its average collection period to 15 days, what will be its new level of accounts receivable? c. Brenmar's inventory turnover ratio is 9.4 times. What is the level of Brenmar's inventories?

Answer 1

(a)-Average Collection Period

Average Collection Period = Accounts Receivables / Average Credit Sales per day

= $563,000 / [($93,00,000 x 0.79)/365 Days]

= $563,000 / $20,128.77 per day

= 27.97 Days

“Average Collection Period = 27.97 Days”

(b)-New Level of Accounts Receivables

Average Collection Period = Accounts Receivables / Average Credit Sales per day

15 = Accounts Receivables / $20,128.77 per day

Accounts Receivables = $20,128.77 per day x 15 Days

Accounts Receivables = $3,01,932

“New Level of Accounts Receivables = $3,01,932“

(c)- Level of​ Brenmar's inventories

Cost of goods sold Ratio = 100% - Gross Profit Ratio

= 100% - 26%

= 74%

Cost of goods sold = Total Sales x Cost of goods sold Ratio

= $93,00,000 x 74%

= $68,82,000

Inventory Turnover ratio = Cost of goods sold / Inventories

9.40 = $68,82,000 / Inventories

Inventories = $68,82,000 / 9.40 Times

Inventories = $7,32,128

“The Level of Brenmar's inventories = $7,32,128”