Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30

Question

Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay. (Use 365 days in a year.)

What is the average receivables balance? (Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

What is the receivables turnover? (Round the final answer to 2 decimal places.)

If Maddox offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $180,000 for your calculation of receivables. (Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

If Maddox reduces its bank loans, which cost 12 percent, by the cash generated from reduced receivables, what will be the net gain or loss to the firm? Use the full sales of $180,000 for your calculation of receivables. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Assume the new trade terms of 2/10, net 30 will increase sales by 20 percent because the discount makes Maddox price competitive. If Maddox earns 16 percent on sales before discounts. what will be the Net change in income? (Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay. (Use 365 days in a year.)

Explanation / Answer

a-1) Customers take 30 days to pay, therefore Days' Sales outstanding is 30 days.

Days' Sales Outstanding = (Accounts receivable / credit sales) x 365 days

or, 30 = (Accounts receivable / $180,000) x 365

or, Accounts receivable = (30 / 365) x $180,000 = $14,794.52055 or $14,795

a-2) Receivables turnover = Sales / Accounts receivable = $180,000 / $14,795 = 12.17

b) Now the Days' Sales Outstanding is reduced to 10 days, therefore -

New accounts receivables = (10 / 365) x $180,000 = $4,931.5068 or $4,932

c-1) Earlier, the company was paying 12% interest on the blocked receivables of $14,795.

Interest paid earlier = $14,795 x 12% = $1,775.4 or $1,775

Now, it pays interest on the blocked receivables of $4,932.

Interest paid now = $4,932 x 12% = $591.84 or $592

Savings in interest = $1,775 - $592 = $1,184

Also, it would give cash discount to customers = $180,000 x 2% = $3,600

Net Change = $1,184 - $3,600 = ($2,416)

c-2) No

d-1) Change in sales = 20% x $180,000 = $36,000

Change in earnings = $36,000 x 16% = $5,760

Discount = 2% x ($180,000 + $36,000) = $4,320

Net change in income = $5,760 - $4,320 = $1,440

If the above is incorrect, try below -

New accounts receivable = (10 / 365) x ($216,000) = $5,917.8082 or $5,918

Interest on loan = $5,918 x 12% = $710.16 or $710

Net change in income = $5,760 - $4,320 - $710 = $730

d-2) Yes

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