A supply company, sells on terms of3/10, net 30. Gross sales for the year are $1

Question

A supply company, sells on terms of3/10, net 30. Gross sales for the year are $1,200,000 and thecollections department estimates that 30% of the customers pay onthe tenth day and take discounts, 40% pay on the thirtieth day, andremaining 30% pay, on average, 40 days after the purchase. (Assume360 days /year.)

1.     Calculate the firm’s averagecollection period.

2.     Calculate the firm’s currentreceivables balance.

3.     Calculate the firm’s newreceivables balance if the company toughened up on its collectionpolicy, with the result that all non-discount customers paid on the30th day.

Explanation / Answer

a. 30% on 10th day = 30%*10 days = 3 days b. 40% on 30th day = 40%*30 days = 12 days c. 30% on 40th day = 30%*40days = 12 days ================================= Avge collection period = 27 days
2. Avge colelction period = Receivables/ Annual Sales perday So Receivables = Avge collection period * Annual Sales per day= 27 Days * $1200,000/360days = $90,000
3. So 30% customers who get discount when they pay on 10th day= 30%*10 = 3 days Balance 70% will pay by 30th day = 70%*30 days = 21 days =============================================================== Avge collection period = 24 days
So Receivables = Avge collection period * Annual Sales per day= 24 Days * $1200,000/360days = $80,000
So by tightening its collection policy, Firm was able toreduce its receivables by $10,000

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