A surgical supply company sells on terms on 3/10, net 30. That means customers that pay in 10 days get a 3% discount, while customers that do not take the discount must pay in 30 days. Gross sales for the year are 1, 200,000; the collections dept estimates that 30% by dollar value of the customers pay on the 10th day and take discounts, 40% pay on the 30th day and the remaining pay on average on the 40th day ( assume 360 days a year)
a. What is the firm's average collection period?
b. What is the firm's current receivable balance?
c. What would the firm's new receivable balance be if the firm toughened up the collection policy that would result that all non discount customers pay 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 has to be financed.)