Milwaukee Surgical Supplies, Inc. sells on terms of 3/10, net 30. That means customers that pay in ten days get a 3 percent discount on their purchases, while customers that do not take the discount must pay in 30 days. Gross sales (sales before any discounts taken) for the year are $1,200,000 and the collections department estimates that 30 percent of the customers pay on the 10th day and take discounts, 40 percent pay on the 30th day, and the remaining 30 percent pay, on average, on the 40th day after the purchase. (Assume 360 days per year.)

a.What is the firm’s average collection period?

b.What is the firm’s current receivables balance?

c. What would the firm’s new receivables balance be if Milwaukee Surgical toughened up on its collection policy, with the result that all nondiscount customers paid on the 30th day?

d. Suppose that the firm’s cost of carrying receivables was 8 percent annually. How much would the toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire amount of receivables has to be financed.)