Data on Shick Inc. for 2011 are shown below, along with the days sales outstandi
ID: 2670821 • Letter: D
Question
Data on Shick Inc. for 2011 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.Sales $110,000
Accounts receivable $16,000
Days sales outstanding (DSO) 53.09
Benchmarks' days sales outstanding (DSO) 20.00
a. $ 8,078
b. $ 8,975
c. $ 9,973
d. $10,970
e. $12,067
Explanation / Answer
According to the given information,
SAles = $110,000
Accounts receivables = $16,000
Days sales outstanding = 53.09
Benchmark's Days sales outstanding = 20.00
If the Days sales outstanding is brought to Benchmark's average, then the amount of receivables that should be reduced is calculated as
Days sales outstanding = 365 days / Receivables turnover ratio
53.09 = 365 days / Rceivables turnover ratio
Rceivables turnover ratio = 365 days / 53.09
= 6.875 times
Therefore, the actual receivables turnover ratio is 6.875 times
From this we have to calculate the benchmark's receivables turnover ratio.
Days sales outstanding = 365 days / Receivables turnover ratio
20.00 = 365 days / Rceivables turnover ratio
Rceivables turnover ratio = 365 days / 20.00
= 18.25 times
Therefore, the benchmark's receivables turnover ratio is 18.25 times
Receivables turnover ratio = Net sales / Accounts receivables
18.25 = $110,000 / Accounts receivables
Accounts receivables = $110,000 / 18.25
= $6,027
Therefore, the benchmark's receivables is $6,027
The reduction in the actual receivables is
Receivables reduced = Actual receivables - Benchmark's receivables
= $16,000 - $6,027
= $9,973
Therefore, the receivables reduced by $9,973
The correct option is c) $9,973
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