Hi,

I'm not quite sure how to work the following question out, can anyone help with an explanation please?

If debtor days are 3 months; debtors at the end of the period are $200,000; the cost of sales ar $600,000 and operating asset turnover is 5 times what is the gross profit to sales ratio? A) 10%; B) 15%; C) 20% or D) 25%.

If the end-of-year total receivables are 200K, and this amount represents 1/4 of a year's worth of total sales (since "debtor days" is 3 months), then the total sales for the year must be..

Then comparing the total year's sales you just derived, to the total cost of sales, tells you that the total gross margin for the year is..

Finally, that gross margin is what % of sales?

Thanks ArcSine. Sounds very easy when explained that way.. (I'm guessing from this that the bit about asset turnover is irrelevant and purely designed to trip you up) Ive filled in the blanks below, which 'hopefully' is correct..

If the end-of-year total receivables are 200K, and this amount represents 1/4 of a year's worth of total sales (since "debtor days" is 3 months), then the total sales for the year must be 800K

Then comparing the total year's sales you just derived, to the total cost of sales (600K), tells you that the total gross margin for the year is 200K

Finally, that gross margin is 25% of sales?

You got it, amigo. And yeah, that asset T.O. figure was just a little smokescreen; not so much planted by an evil question-writer, but rather designed to give out a little whiff of real-world. Trying to solve a problem out in the wild, you'll be looking at a large haystack of data, and trying to discern those two or three needles you actually need, without getting lost in the haystack itself.