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Dear Sirs,
Could you please help me to tackle the below questions
Crag Co has sales of $200m per year and the gross profit margin is 40%. Finished goods inventory days vary throughout the year within the following range:
Inventory days maximum = 120 days
Inventory days minimum = 90 daysAll purchases and sales are made on a cash basis and no inventory of raw materials or work in progress is carried.
Crag Co intends to finance permanent current assets with equity and fluctuating current assets with its overdraft.
In relation to finished goods inventory and assuming a 360-day year, how much finance will be needed from the overdraft?
The answer is = 200* 0.6*30/360 = 10 but I do not understand how to derive the solution?
The only working capital is inventory. There will always be at least 90 days of inventory and so this will be financed by long-term capital.
The extra inventory fluctuates up to a maximum of 120 days and so the extra to be financed from short-term capital is 30 days worth of inventory.The gross profit margin is 40% of sales, and therefore the cost of goods is 60% x 200M.
With 360 days in a year, 30 days inventory will therefore cost 30/260 x 60% x 200M.
I do suggest that you watch my free lectures on working capital.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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