Question

(Efficiency analysis) The Brenmar Sales Company had a gross profit margin (gross profits = sales) of 28 percent and sales of $8.9 million last year. 78 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 $299,900, and it has $109,300 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 25 days, what will be its new level of accounts receivable? c. Brenmar's inventory turnover ratio is 8.6 times. What is the level of Brenmar's inventories? a. If Brenmar's accounts receivable equal $563,300, what is its average collection period? The company's average collection period will be days. (Round to two decimal places.)

Answer 1

Total Sales = $8,900,000

Credit Sales = 78% * Total Sales
Credit Sales = 78% * $8,900,000
Credit Sales = $6,942,000

Gross Profit = (Total Sales - Cost of Goods Sold) / Total Sales
0.28 = ($8,900,000 - Cost of Goods Sold) / $8,900,000
$2,492,000 = $8,900,000 - Cost of Goods Sold
Cost of Goods Sold = $6,408,000

Answer a.

Average Collection Period = 365 * Accounts Receivable / Credit Sales
Average Collection Period = 365 * $563,300 / $6,942,000
Average Collection Period = 29.62 days

Answer b.

Average Collection Period = 365 * Accounts Receivable / Credit Sales
25.00 = 365 * Accounts Receivable / $6,942,000
Accounts Receivable = $475,479.45

Answer c.

Inventory Turnover = Cost of Goods Sold / Inventories
8.60 = $6,408,000 / Inventories
Inventories = $745,116.28