Table 1. Accounts Receivables Outstanding, December 2013
Days Outstanding Amount
0-10 days 20,000
10 - 20 days 150,000
20 - 30 days 400,000
30 - 40 days 650,000
40 - 50 days 430,000
50 - 60 days 350,000
Total A/R 2,000,000
Table 2. New Terms for Cash Discounts
Alternative Terms
1 1/10, net 30
2 2/10, net 30
3 3/10, net 30
1. Compute the current average collection period based on the data in Table 1. In doing this, multiply the midpoint of the days outstanding, by the weight assigned to that category. For Example, the midpoint of the second company is 15 days and the category represents 7.5 percent of total accounts receivable ($150,000/$2,000,000). Its value is 1.125 days (15 days x .075). After this process is followed for all six categories, add up the total to get the average collection period.
2. Compute the new average collection period based on the terms in Table 2 and the results of the pilot study. Use the simplifying assumption that under the new policies all customers will all pay at the end of the 10th day or the end of the 30th day.
i.e., for the 1/10, net 30
10% x 10 days = 1 day
90% x 30 days = 27 days
28 days average collection period
3. Assuming average daily credit sales remain at $54,274 per day, what will be the new accounts receivable balance based on the three new cash discount policies?
4. Compute the cost of the cash discount based on the three policies under consideration. Recall that total credit sales were $18 million. Multiply total credit sales times the percent that tuse the discount for each new discount policy tmes the size of the discount.
5. Compute the amount of freed up funds based on the three different cash discount policies based on the following:
Old accounts receivable (give in table 1)
New accounts receivable (Question 3)
Freed up funds