Note: When converting annual data to daily data or vice versa in these problems, assume there are 365 days per year.

Problem 2

Drake Paper Company sells on terms of net 30. The firms variable cost ratio is 0.80.

a. If annual credit sales are $20 million and its accounts receivable average is 15 days overdue, what is Drakes investment in receivables?

b. Suppose that, as the result of a recession, annual credit sales decline by 10 percent to $18 million, and customers delay their payments to an average of 25 days past the due date. What will be Drakes new level of receivables investment?