In: Finance
Trix Company sells to grocery stores on credit terms of "net 60." Annual credit sales are $11 million (spread evenly throughout the year) and its accounts average 10 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75% of sales). Suppose that Trix's sales are expected to increase by 32% next year. Determine the firm's average investment in receivables for next year under these conditions.
Enter your answers in millions and round to the second decimal place. $11,115,000 would be entered as 11.12
Solution: | |||
Firm's average investment in receivables $ | 2.78 | millions | |
Working Notes: | |||
Firm's average investment in receivables | |||
= Average outstanding days x projected annual sales/365 | |||
Average outstanding days = Net credit period + Average over due period | |||
Average outstanding days = 60 + 10 = 70 days | |||
Projected annual sales = Current annual sales x (1+ increase %) | |||
Projected annual sales = $11 million x (1+ 32%) | |||
Projected annual sales = $11 million x (1+ 0.32) | |||
Projected annual sales = $14.52 million | |||
Firm's average investment in receivables | |||
= Average outstanding days x projected annual sales/365 | |||
= 70 x 14.52/365 | |||
=$2.78465575 millions | |||
=$2.78 millions | |||
Please feel free to ask if anything about above solution in comment section of the question. |