The Brenmar Sales Company had a gross profit margin? (gross profits ÷? sales) of

Question

The Brenmar Sales Company had a gross profit margin? (gross profits ÷? sales) of 29 percent and sales of $ 9.4million last year. 77 percent of the? firm's sales are on? credit, and the remainder are cash sales. ? Brenmar's current assets equal $ 1.1million, its current liabilities equal 302,000?, and it has $102,900 in cash plus marketable securities.

a. If? Brenmar's accounts receivable equal $563,300?, 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 9.3 times. What is the level of? Brenmar's inventories?

Explanation / Answer

a)

Credit sales = 0.77 * 9,400,000 = 7,238,000

Receivables turnover ratio = Net credit sales / Average receivables

Receivables turnover ratio = 7,238,000 / 563,300

Receivables turnover ratio = 12.8493

Average collection period = 365 / Receivables turnover ratio

Average collection period = 365 / 12.8493

Average collection period = 28.41 days

b)

20 = 365 / Receivables turnover ratio

Receivables turnover ratio = 365 / 20

Receivables turnover ratio = 18.25

18.25 = 7,238,000 / Average Receivables

Average Receivables = $396,602.74

c)

Inventory turnover ratio = COGS / Average inventory

Gross profit margin = gross profit / sales

0.29 = Gross profit / 9,400,000

Gross Profit = 2,726,000

COGS = Sales - Gross profit

COGS = 9,400,000 - 2,726,000

COGS = 6,674,000

9.3 = 6,674,000 / Inventories

Inventories = 717,634.41

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