Question
Milwaukee Surgical Supplies, Inc. has gross sales for the year of $1,200,000. The collections department estimates that 30% of the customers pay on the tenth
Milwaukee Surgical Supplies, Inc. has gross sales for the year of $1,200,000. The collections department estimates that 30% of the customers pay on the tenth day, 40% pay on the thirtieth day, and the remaining 30% pay, on average, on the fortieth 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 the 70% of customers that did not pay by the tenth day paid on day 30?
d. Suppose that the firm's cost of carrying receivables was 8% annually. How much would the toughened credit policy save the firm in annual receivables carrying expenses? (Assume that the entire amount of receivables has to be financed.)
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