(Efficiency analysis) The Brenmar Sales Company had a gross profit margin (gross
ID: 2654249 • Letter: #
Question
(Efficiency analysis) The Brenmar Sales Company had a gross profit margin (gross profits sales) of 31 percent and sales of $8.4 million last year. 79 percent of the firm?s sales are on credit, and the remainder are cash sales. Brenmar's current assets equal $1.2 million, its current liabilities equal $299,700, and it has $108,900 in cash plus marketable securities. a. If Brenmar?s accounts receivable equal $561,600, what is its average collection period? b. If Brenmar reduces its average collection period to 25 days, what will be its new level of accounts receivable? c. Brenmar?s inventory turnover ratio is 8.5 times. What is the level of Brenmar?s inventories?Explanation / Answer
a. Receivable Turnover Ratio = Net Sales/Accounts Receivable
= 6636000/561600 = 12 times
Average collection Period = 365/12 = 30 Days
b. If Average collection Period is reduced to 25 Days, New level of Accounts receivable would be :
25= 365/Receivable Turnover Ratio
DTR = 15 Times
15 = 6636000/Accounts Receivable
Accounts Receivable = 6636000/15
Accounts Receivable = 442400
New level of Accounts receivable would be 442400
c. Inventory Turnover Ratio = Sales/Inventories
8.5 = 8400000/Inventories
Inventories = 8400000/8.5
= 988235
25= 365/Receivable Turnover Ratio
DTR = 15 Times
15 = 6636000/Accounts Receivable
Accounts Receivable = 6636000/15
Accounts Receivable = 442400
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