milwaukee surgical supplies, inc sells on terms of 3/10, net 30. gross sales for

Question

milwaukee surgical supplies, inc sells on terms of 3/10, net 30. gross sales for the year are $1,200,000, and the collections department estimates that 30% of the customers pay on the tenth day and take discounts, 40% pay on the thiritieth day and the remaining 30% pay,on avg,40 days after the purchase.(assume 360 days per year)
a. what is the firm's avg collection period?
b. what is the firm's current receivables balance?
c. what would be the firm's new receivables balance if Milwaukee Surgical toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?
d. suppose that the firm's cost of carrying receivables was 8% annually. how much would the toughened credit policy save the firm in annual receivables carrying expense?(assume that the entire amount of receivables had to be financed)

Explanation / Answer

Firm’s average collection period (ACP) can be calculated using the following formula: ACP = (30% * 10days) + (40% * 30days) + (30% * 40days) = (0.3 * 10days) + (0.4 * 30days) + (0.3 * 40days) = (3 + 12+ 12) = 27 days Hence the firm’s average collection period is 27 days. The firm’s current receivable balance can be calculated using the following formula: Current Receivable balance is: ADB * ACP Where ACP = 27 days, ADB = Gross sales / working days in a year = 1,200,000 / 360 = 3,333.33 Therefore Current Receivables balance = ACP * ADB = 27 * 3333.33 = $ 89, 999.91 = $ 90,000. Hence the current receivables balance is $90,000. = 27 * 3333.33 = $ 89, 999.91 = $ 90,000. Hence the current receivables balance is $90,000.

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