Milwaukee Surgical Supplies, Inc., has gross sales for the year of $1,200,000. The collections department estimates that 30 percent of the customers pay on the tenth day, 40 percent pay on the thirtieth day, and the remaining 30 percent pay, on average, 40 days after the purchase. (Assume 360 days per year.)

a) What is the firm's average collection period

The firm's ACP (Average Collection Period) is:

ACP = (% of customers who pay * when they pay) + (% of customers who pay * when they pay)

+ (% of customers who pay * when they pay)

ACP =

ACP =

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

ADS = sales/days during the fiscal year

ADS =

Current Receivables Balance = ADS * ACP

Current Receivables Balance =

c) What would be the firm's new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all customers previously paying on day 40 now paid on the thirtieth day?

Then, the new current receivables balance would be:

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 cost? (Assume that the entire amount of receivables had to be financed.)