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In: Finance

Trinity Surgical Supplies, Inc. sells on terms of 2/10, net 30. Gross sales for the year...

Trinity Surgical Supplies, Inc. sells on terms of 2/10, net 30. Gross sales for the year are $1.5 million, and the collections department estimates that 25 percent of the customers pay on the tenth day and take discounts; 50 percent pay on the thirtieth day; and the remaining 25 percent pay, on average, 40 days after the purchase. (Assume 360 days per year.) a. What is the firm's average collection period? b. What is the firm's current receivables balance? c. What would be the firm's new receivables balance if Trinity Surgical toughened up on its collection policy, with the result that all nondiscount customers paid on the 30th day? d. Suppose that the firm's cost of carrying receivables was 10 percent annually. How much would the toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire amount of the receivables had to be financed.)

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Expert Solution

Answer (a):

Firm's average collection period = 27.5 days

Answer (b):

Firm's current receivables balance = $114,583.33

Working:

Firm's current receivables balance = Gross sales for the year / 360 * Firm's average collection period

=1500000 /360 * 27.5

= $114,583.33

Answer (c):

Firm's new receivables balance = $104,166.67

Working:

Firm's new average collection period = 25 days

Firm's new current receivables balance = Gross sales for the year / 360 * Firm's average collection period

=1500000 /360 * 25

= $104,166.67

Answer (d):

Saving in annual receivables carrying expense = (Firm's new current receivables balance - Firm's old current receivables balance) * cost of carrying receivables

= ($114,583.33 - $104,166.67) * 10%

=$1,041.67

Saving in annual receivables carrying expense = $1,041.67

jeff jeffy answered 6 months ago

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