Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000 and the collections department estimates that 30% of the customers pay on the tenth day and take discounts, 40% pay on the thirtieth day, and remaining 30% pay, on average, 40 day after the purchase. (Assume 369 days /year.)
Calculate the firm’s average collection period.
Sol) Firm’s average collection period (ACP) can be calculated using the following formula:
ACP = (30% * 10days) + (40% * 30days) + (30% * 40days)
= (0.3 * 10days) + (0.4 * 30days) + (0.3 * 40days)
= (3 + 12+ 12)
= 27 days
Hence the firm’s average collection period is 27 days.
Calculate the firm’s current receivables balance.
Sol) The firm’s current receivable balance can be calculated using the following formula: Current Receivable balance is: ADB * ACP
Where ACP = 27 days,
ADB = Gross sales / working days in a year = 1,200,000 / 360
Therefore Current Receivables balance = ACP * ADB
= 27 * 3333.33
= $ 89, 999.91
= $ 90,000.
Hence the current receivables balance is $90,000.
Calculate the firm’s new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customers paid on the 30th day. Sol) The firm’s new receivables balance is calculated as follows: Receivables balance = ADB * ACP
Where ADB = 3,333.33 and ACP = (30% * 10days + 70% * 30days) = (0.3 * 10 + 0.7 * 30) = (3 + 21)
= 24 days.
Therefore New Receivables...
References: Gapenski, L (2008). Healthcare Finance: Introduction to Accounting and Financial Management. (4rth Edition).
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