Question

ALei Industries has credit sales of $158 million a year. Alley's management reviewed its credit policy and decided that it wants to maintain an average collection period of 35 days.

A. What is the maximum level of accounts receivable that ALei can carry and have a 35-day average collection period?

B. If ALei's current accounts receivable collection period is 60 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 35 days?

HELP PLEASE.

Answer 1

A)

Average collection period = Accounts receivable Daily credit sales

35 days = Accounts receivable ($ 158,000,000 365 days)

Accounts receivable = $ 15,150,685

Thus the maximum level of accounts receivable that the firm can carry and have a 35 days average collection period is $ 15,150,685

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B)

Find the accounts receivable for an average collection period of 60 days.

60 days = Accounts receivable ( $ 158,000,000 365 days)

Accounts receivable = $ 25,972,603

The level of accounts receivable it has to reduce to have an average collection period of 35 days is found by subtracting the accounts receivable at 60 days collection period  with the accounts receivable at 35 days collection period.

Level of accounts receivable it has to reduce to have 35 days average collection period = $ 25,972,603 - $ 15,150,685

Level of accounts receivable it has to reduce to have 35 days average collection period = $ 10,821,918