Assignment
Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000 and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts, 40 percent 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 (ACP)?
ACP (Average Collection Period) = (number of billings x day of billings) + (number of billings x day of billings) = days (ACP).
b) What is the firm's current receivables balance (CRB)?
Current receivables balance (CRB) =Average Daily Billing (ABD) x Average Collection Period (ACP)
c) What would be the firm's new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customers paid on the 30th day?
The Receivables balance = Average daily sales (ADS) x Average Collection Period (ACP)
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.)
Step 1: Old Carrying Receivables at 8 % = (Percent Annually) x (Old Receivables Balance)
Step 2: New Carrying Receivables at 8 % = (Percent Annually) x (New Receivables Balance)
Step 3: Carrying Expense Saved = (Old Receivables Balance - New Receivables Balance).