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Sir can you please explain me that how to do the following question
Crag co has sales of $200m per year and GP margin is 40%. FG inventory days vary throughout the year within the following range:
Inventory days 120 90
All purchases and sales are made on a cash basis and no inventory of RM or WIP is carried. Crag co intends to finance permanent CAs with equity and fluctuating CAs with its O/D.
In relation to FGs inventory and assuming a 360 day year, how much finance will be needed from overdraft?
Correct ans is $10m
The workings for the answer are printed in the Revision Kit!!
The minimum inventory of 90 days will be financed by equity (the question says so). It is only the extra 30 days fluctuating inventory that is financed by the overdraft.
30/360 x (60% x $200M) = $10M
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