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Please help me to explain Q5 of mock exam 1: why finance needed from the overdraft =(maximum inventory days – minimum inventory day)*sale/360 day *(1-gross profit margin).Thank you.
I have no idea which mock exam you are referring to. Various companies provide mock exams.
Given that the sales are $200M per year and the gross profit margin is 40%, the cost of the goods must be 60% x $200M per year = $120M, or $120M/360 per day.
You will know from my lectures that the minimum inventory level of 90 days will be financed from permanent working capital and that therefor the addition 120 – 90 = 30 days will be financed using fluctuating working capital (which the question says is provided by the overdraft).
The overdraft finance needed from the overdraft will therefore be the 30 days at $120/360 per day, as is in the BPP answer.
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