A surgical supply company sells on terms on 3/10, net 30. That means customers t

Question

A surgical supply company sells on terms on 3/10, net 30. That means customers that pay in 10 days get a 3% discount, whicle customers that do not take the discount must pay in 30 days. Gross sales for the year are 1, 200,000; the collections dept estimates that 30% by dollar value of the customers pay on the 10th day and take disounts, 40% pay on the 30th day and the remianing pay on average on the 40th day ( assume 360 days a year)

a. What is the firm's average collection period?

b. What is the firm's current recievable balance?

c. What would the firm's new recievable balance be if the firm toughened up the collection policy that would result that all nondiscount customers pay on the 30th day?

d. Suppose that the firm's cost of carrying recievables was 8% annulaly. How much would the toughened credit policy save the firm in annual recievables carrying expense? (assume that the entire amount of recievables has to be financed.)

Explanation / Answer

a. Firm's average collection period = 30% x 10th day + 40% x 30th day + 30% x 40th day Firm's average collection period = 27 days b. Firm's current recievable balance Average daily sales = $1,200,000/360 days $3,333.33 Current recievable = Average daily sales x Average colllection period $3333.33 x 27 days $90,000.00 c. Firm's average collection period = 30% x 10th day + 70% x 30th day Firm's average collection period = 24 days Average daily sales = $1,200,000/360 days $3,333.33 Current recievable = Average daily sales x Average colllection period $3333.33 x 24 days $80,000.00 d. Initial carrying Expenses = 90,000 x 8% $7,200.00 Carrying Expense = $80,000 x 8% $6,400.00 Amount Saved $800.00

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