A supply company sells on terms of 3/10, net 30. Gross sales for the year are $1

Question

A supply company sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000 and the collectionsdepartment estimates that 30% of the customers pay on the tenth dayand take discounts, 40% pay on the thirtieth day, and remaining 30%pay, on average, 40 days after the purchase. (Assume 360 days/year.)

1.     Assuming the cost to the firm to carryreceivables is 8% per annum, calculate the annual savings resultingfrom the toughened credit policy. (Assume the entire amountof receivables had to be financed.)

Explanation / Answer

Initial carrying Expense   7,101 New carrying Expense   6,312 AmountSave                   789

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