(Efficiency analysis) The Brenmar Sales Company had a gross profit margin (gross

Question

(Efficiency analysis)The Brenmar Sales Company had a gross profit margin (gross

profitsdivided by ÷sales)

of

3131

percent and sales of

$ 9.8$9.8

million last year.

7777

percent of the firm's sales are on credit, and the remainder are cash sales. Brenmar's current assets equal

$ 1.4$1.4

million, its current liabilities equal

$ 298 comma 200$298,200,

and it has

$ 107 comma 400$107,400

in cash plus marketable securities.a. If Brenmar's accounts receivable equal

$ 562 comma 100$562,100,

what is its average collection period?b. If Brenmar reduces its average collection period to

1515

days, what will be its new level of accounts receivable?c.Brenmar's inventory turnover ratio is

9.79.7

times. What is the level of Brenmar's inventories?

a.If Brenmar's accounts receivable equal

$ 562 comma 100$562,100,

what is its average collection period?The company's average collection period will be

nothing

days.(Round to two decimal places.)

Explanation / Answer

Given :
Gross Profit margin = 31%
Sales = $9.8 million
77% of sales = credit sales = 77%*9800000 = $7546000
23% of sales = Cash sales
Current Assets = $1.4 million
Current Liabilities = $298200
Cash + Marketable securities = $107,400


a) With Accounts Receivables = $562,100, we need to calculate the Average Collection Period

Average Collection Period is the time taken by the firm to collect its amount due from its creditors in the form of accounts receivables. It is calculated as follows:

Average Collection Period = 365/(Accounts Receivables Turnover)

Accounts Receivable Turnover = Net Credit Sales/ Accounts receivables
                                                       = 7546000/562100
                                                = 13.425

Average Collection Period = 365/13.425
                                               = 27.19 days

Average collection period is 27.19 days

b) Now, the average collection period is reduced to 15 days.
All else remaining same

Average collection Period = (365*Accounts Receivables)/Net Credit Sales
           15 = 365* AR/7546000

Accounts Receivables = 15*7546000/365                                                
                                       = 310109.59

The new Accounts Receivables is $310109.59

c) Given : Inventory Turnover Ratio = 9.7 times

Inventory Turnover = Total Sales/Inventory
9.7 = 9800000/Inventory
Inventory = 9800000/9.7
                  = $1010309.28

Brenmar’s Inventory level would be $1010309.28.

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