15-5 Klein\'s Tools is considering offering a cash discount to speed up the coll

Question

15-5 Klein's Tools is considering offering a cash discount to speed up the collection of accounts receivable. Currently the firm has an average collection period of 65 days, annual sales are 35,000 units, the per-unit price is $40, and the per-unit variable cost is $29. A 2% cash discount is being considered. Klein's Tools estimates that 80% of its customers will take the 2% discount. If sales are expected to rise to 37,000 units per year and the firm has a 15% required rate of return, what minimum average collection period is required to approve the cash discount plan?

Explanation / Answer

Increase in CM = 2000*40-29 = 22000 Less discount 37000*40*.8*.02 = = 23680 Net loss = = 1680 The loss to be covered by reducing the account receivable investment which should be 1680/.15 = 11200 AT present the Account receivable = 35000*40/365*65 = 249315 Less decrease required =-11200 The new Account receivable should be =238115 Average collection period should be = 365/1480000/238115 = 58.72 or 59 days.

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