Accounts Receivable This problem is to be use for the next e

Accounts Receivable This problem is to be use for the next eight questions of the exam The PARA Company sales are $2 million. ts variable costs are 65 percent of sales,and excess capacity would permit a substantial expansion in sales without additional fied costs, Management is considering a change in credit policy,and you are asked to analyze the potential benefits of the change. Currently,the company sell on terms of 2/10 net 30. Twenty percent of its customers take the discount with the remaining paying on average in 40 days. Bad debt losses are running at 4% of sales. The costs of capital tied up in receivables is 15 percent PARA is considering changing the terms of trade from 2/10 net 30 to 5/10, net 30. Half of PARA\'s customers will take the new discount and pay on the 10th day. The other half will have an ACP of 40 days. Sales will increase by $600,000 and bad debt losses will decline to 3% of total sales.

Solution

Existing A/R: Average collection period (days) = 10*20%+40*80% = 34 Level of receivables = 2000000*34/365 = $ 1,86,301 Changed A/R: Average collection period (days) = 10*50%+40*50% = 25 Changed level of receivables = 2600000*25/365 = $ 1,78,082 Difference in receivables = 178082 - 186301 = $      -8,219 New investment in receivables = -8219*65% = $      -5,342 [Answer]