Question

(Efficiency analysis) The Brenmar Sales Company had a gross profit margin (gross profits ÷ sales) of 26 percent and sales of $8.3 million last year. 70 percent of the firm's sales are on credit, and the remainder are cash sales. Brenmar's current assets equal $1.4 million, its current liabilities equal $295,500, and it has $109,900 in cash plus marketable securities.

 a. If Brenmar's accounts receivable equal $561,700, 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 8.2 times. What is the level of Brenmar's inventories?

Answer 1

(a). Average collection period = 35.29 days

Explanation;

Formula of average collection period = (Accounts receivable * 365 / Credit sales)

Accounts receivable = $561700

Credit sales ($8300000 * 0.7) = $5810000

Now let’s put value in the formula;

Average collection period ($561700 * 365 / $5810000) = 35.29 days

(b). New level of accounts? receivable = $238767.12

Explanation;

Formula of average collection period = (Accounts receivable * 365 / Credit sales)

Credit sales ($8300000 * 0.7) = $5810000

Average collection period = 15 days

Now let’s put value in the formula;

15 = (Accounts receivable * 365 / $5810000)

Accounts receivable = 15 * $5810000 / 365

Thus new level of accounts receivable = $238767.12

(c). New level of accounts? receivable = $749024.39

Explanation;

Formula of inventory turnover ratio = (Cost of goods sold / Inventory)

Sale = $8300000

Gross profit ($8300000 * 0.26) = $2158000

Cost of goods sold ($8300000 - $2158000) = $6142000

Inventory turnover ratio is given = 8.2 times

Now let’s put value in the formula;

8.2 = ($6142000 / Inventory)

Inventory = $6142000 / 8.2

Thus inventories = $749024.39