5) Assuming that a company has $365 million in annual sales, and a gross margin

Question

5) Assuming that a company has $365 million in annual sales, and a gross margin of 20%. If the company now stocks 60 day’s worth of inventory, how much do they have to have invested (that is, tied up in) in inventory to support their operations? If the company were to stock 61 day’s worth of inventory instead of 60 days, how much additional investment in inventory would be needed to support their operations?

6) Assuming that a company has $365 million in annual sales, and a gross margin of 20%. If the company now takes 30 days, on average, to collect Accounts Receivable, how much does the company have invested in (that is, tied up in) Accounts Receivable? If the company were to take 31 days , on average, to collect Accounts Receivable , instead of 30 days, how much additional investment in Accounts Receivable would be required?

Explanation / Answer

5. With $365M in annual sales, the company averages $1M per day in sales. The company has a gross margin of 20%, meaning that of the $1M in daily sales, costs represent $800k and profits represents $200k. Therefore, a day of inventory is $800k. For 60 days, this is $800k*60 = $48M. To stock an additional day of inventory, it would cost the company $800k. 6. Again, the company averages $1M per day in sales. If it takes 30 days to collect the revenue, the company has $30M invested, or tied up, in accounts receivable. For every additional day to collect it would cost the company $30M.

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