Milwaukee Surgical Supplies Inc. sells on terms of 3/10, net 30. That means customers that pay in ten days get a 3 percent discount on their purchases, while customers that do not take the discount must pay in 30 days. Gross sales (sales before any discounts taken) for the year are $1,200,000; the collections department estimates that 30 percent (by dollar value) 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, on the fortieth day 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 the firm’s new receivable balance be if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customers paid on the thirtieth 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 expenses? (Assume that the entire amount of receivables has to be financed.)