Ruth Home Health currently has $1,000,000 in accounts receivable. Its days in pa

Question

Ruth Home Health currently has $1,000,000 in accounts receivable. Its days in patient accounts receivable (DPAR) is 50 days (based on a 365-day year). The agency wants to reduce its DPAR to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The CFO estimates that, if this policy is adopted, the agency's net patient service revenue will fall by 10 percent. Assuming that the agency adopts this change and succeeds in reducing its DPAR to 32 days and loses 10 percent of its net patient service revenue, what will be the level of accounts receivable following the change?

Explanation / Answer

DPAR can be calculated using the formula below

DPAR = 365 * A/R / Sales

Here DPAR is 50, A/R is 1,000,000. We can calculate total sales from here.

We get sales as $7,300,000

Now after implementing new policy, sales are decreased by 10%, so new sales = 7.3 * (1-10%) = 6,570,000

Again in the formula above, we have

New DPAR as 32, Sales as 6570000, so we can calculate A/R

After substituting we get A/R as $576,000

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.