Trix Company sells to grocery stores on credit terms of "net 60." Annual credit sales are...

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

Expert Solution

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.

jeff jeffy answered 2 years ago

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