11. Klein\'s Tools is considering offering a cash discount to speed up the colle
ID: 2800295 • Letter: 1
Question
11. Klein's Tools is considering offering a cash discount to speed up the collection of accounts receivable. Currently the firmm has an average collection period of 68 days, annual sales are 32,000 units, the per-unit price is $44, and the per-unit variable cost is $33. A 3% cash discount is being considered. Klein's Tools estimates that 81% of its customers will take the 3% discount. If sales are expected to rise to 34,000 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
Minimum collection period = 38.99 days
This is calculated below:
Average daily sales = 34000*44/ 365 =4098.63
Increase in Sales = 2000*44 = 88000
Less: Increase in variable costs = 2000*33 = 66000
Less: Discount to customers = 34000*44*81%*3% = 36382.80
Net loss = $14352.80
Amount to be recovered by reducing the AR = 14352.80/ 14% = 102520
New AR should be
Present AR – Decrease required
Present AR = 32000*44*68/365 = 262312.33
New AR = 262312.33- 102520 = 159792.33
Collection period = AR/ Average daily sale
= 159792.33/ 4098.63
= 38.99 days
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