1.Lansing Surgical Supplies, Inc., sells on terms of 2/10, net 30. Gross sales f
ID: 2761184 • Letter: 1
Question
1.Lansing Surgical Supplies, Inc., sells on terms of 2/10, net 30. Gross sales for the year are $1,300,000 and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts, 40 percent pay on the thirtieth day, and the remaining 30 percent pay, on average, 40 days after the purchase. (Assume 360 days per year)
a.What is the firm’s average collection period?
b.What is the firm’s current receivables balance?
c.What would be the firm’s new receivables balance if Lansing 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 percent 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 = Days * Average amount of accounts receivables / Amount of Net Credit Sales
In question we have Average amount of accounts receivables / Amount of Net Credit Sales in Percentage.
So, Answer of Part A as
30 percent of the customers pay on the tenth day
40 percent pay on the thirtieth day
30 percent pay, on average, 40 days
Average collection period = (30% * 10Days) + (40% * 30Days) + (30% * 40Days)
= 3+12+12 = 27 days
Firm’s average collection period = 27 Days
Answer Part B
Firm’s current receivables balance = Average collection period * Average Daily Billing.
Daily Sales = Total Sales / 360 Days
= $1,300,000/ 360 = $3,611.11
Current receivables balance = $3,611.11 * 27
= $97,500
Firm’s current receivables balance = $97,500.
Answer of Part C
Firm’s average collection period = Days * Average amount of accounts receivables / Amount of Net Credit Sales
In question we have Average amount of accounts receivables / Amount of Net Credit Sales in Percentage.
So, Answer of Part C as
30 percent of the customers pay on the tenth day
40 percent pay on the thirtieth day
30 percent also pay on the thirtieth day
Average collection period = (30% * 10Days) + (40% * 30Days) + (30% * 30Days)
= 3+12+9 = 24 days
Firm’s average collection period = 24 Days
Receivables balance = Average collection period * Average Daily Billing.
= $3,611.11 * 24 = $86,666.64
Answer of Part D
Initial Carrying Expense = $97,500 * 8%
=$7,800
New Carrying Expense = $86,666.64* 8%
=$6933.33
Amount Saved = Initial Carrying Expense - New Carrying Expense
= $7,800 - $6933.33
= $866.67
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