11. Klein\'s Tools is considering offering a cash discount to speed up the colle

Question

11. Klein's Tools is considering offering a cash discount to speed up the collection of accounts receivable. Currently the firm has an average collection period of 63 days, annual sales are 31,000 units, the per-unit price is $37, and the per-unit variable cost is $26. A 1% cash discount is being considered. Klein's Tools estimates that 81% of its customers will take the 1% discount. If sales are expected to rise to 33,000 units per year and the firm has a 14% required rate of return, what minimum average collection period is required to approve the cash discount plan? days. (Round to The minimum average collection period required to approve the cash discount plan is two decimal places.)

Explanation / Answer

A / 1 B C D E 2 annual sales 33000 units 3 no days of credit collection period 63 days 4 63 days credit units 5696 units =ROUND(C2/365*C3,0) 5 sale price $37 6 Total credit sales $210,752 =C4*C5 7 Required rate of return 14% per annum 8 total loss of interest for 365 days $29,505.28 =C6*C7 9 Discount offered 1% $2,107.52 =C6*1% 10 Therefore No of days 26.07 days =ROUND(365/C8*C9,0) 11 Hence, the credit should be collected on or before 36.93 days =C3-C10

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