Question

The Brenmar Sales Company had a gross profit margin (gross profits /  sales) of 28% and sales of $8.3 million last year. 73% of the firm's sales are on credit, and the remainder are cash sales. Bertram's current assets equal $1.4 million, its current liabilities equal $299,999, and it has $108,000 in cash plus marketable securities.

A. If Brenmar's accounts receivable equal $563,100, 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 9.2 times. What is the level of Brenmar's inventories?

Answer 1

a)Net credit sales =sales * % of credit sales

                 = 8,300,000* 73%

                 = 6,059,000

Average collection period =365* Average accounts receivable/Net credit sales

                                  = 365* 563100/6059000

                                  = 33.92 days (rounded to 34 days)

b)Average collection period =365* Average accounts receivable/Net credit sales

    20 = 365* AR/6059000

Accounts receivable = 20*6059000/365

                                 = $ 332000

c)Cost of goods sold =sales[ 1-gross profit %]

                = 8,300,000[1-.28]

                = 8,300,000*.72

               = $ 5,976,000

Inventory turnover ratio = Cost of goods sold /inventories

    9.2 = 5976000/Inventories

   Inventories = 5976000/9.2

                = 649,565.22 ( rounded to 649,565)