Answer to Question #290606 in Management for Amir

Question

2 A company has total annual sales (all credit) of $400,000 and a gross profit margin of 20 percent. Its current assets are $80,000; current liabilities, $60,000; inventories, $30,000; and cash, $10,000. (20)

• How much average inventory should be carried if management wants the inventory turnover to be 4?

• How rapidly (in how many days) must accounts receivable be collected if management wants to have an average of $50,000 invested in receivables? (Assume a 360-day year)

Answer 1

a. 

The amount of average inventory that the firm should be carry= 80,000

b. 

Accounts receivable must be collected in =45 days 

Step-by-step explanation

a. 

Using the formula 

Inventory turnover=Cost of goods sold / Average inventory

Then:

Average inventory = COGS / Inventory turnover

Here:

Cost of goods sold = (1- gross profit margin ) * Sales = (1-0.20) *$400,000=$320,000

Therefore

The amount of average inventory that the firm should be carry= 320,000/ inventory turnover 4=80,000

b. 

Using the formula 

Days accounts receivable outstanding = Average accounts receivable / sales *360 days 

Here

Accounts receivable = 50,000

Therefore: 

Accounts receivable must be collected in =$50,000/ 400,000* 360-days a year

Accounts receivable must be collected in =45 days