3. Bolthouse Farms Inc. sells about $36 million a year on credit. Good credit an

Question

3. Bolthouse Farms Inc. sells about $36 million a year on credit. Good credit and collections performance in the industry results in a 30 day ACP. a. What is the maximum receivables balance Bolthouse Farms Inc. can tolerate and still receive a good rating with respect to credit and collections? (Hint: Write the equation defining ACP, treat the A/R balance as the unknown, substitute given or target values and solve). b. If Bolthouse Farms. Inc. is now collecting an average receivable in 40 days, by how much will it have to lower the receivables balance to achieve a good rating?

Explanation / Answer

Average collection period (ACP)=365*Avg Account receivables/Sales

a)

Substituting values with Target ACP =30

30=365* Account receivables/36 million

Account receivables =36*30/365=$2.95890411 million

Thus the Maximum receivables Bolthouse can tolerate =$2.95890411 million

b)

if ACP =40 days

40=365* Account receivables/36 million

Account receivables =36*40/365=$3.945205479 million

For good rating maximum avg receivable required =2.95890411 million

Thus reduction in receivable required for good rating =3.945205479-2.95890411=$0.986301million=$986301

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