Question
In: Finance
ALei Industries has credit sales of $151 million a year. ALei's management reviewed its credit...
ALei Industries has credit sales of $151 million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of 40 days.
a. What is the maximum level of accounts receivable that ALei can carry and have 40-day average collection period?
b. If ALei's current accounts receivable collection period is 50 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 40 days?
Round to one decimal place.
Solutions
Expert Solution
Formula for calculating day sales outstanding:
Day sales outstanding= 365/receivables turnover
40= 365/ receivables turnover
receivables turnover= 365/ 40
= 9.1250 times
Formula for calculating receivables turnover ratio:
Receivables turnover=annual credit sales/ average receivables
9.1250= 151 million/ average receivables
average receivables= 151 million/ 9.1250
= 16.55 million
Therefore, the maximum level of accounts receivable that ALei can carry is 16.6 million.
b.50= 365/ receivables turnover
receivables turnover= 365/ 50
= 7.30 times
- times= 151 million/ average receivables
average receivables= 151 million/ 7.30 times
= 20.68 million
= 20.68 million - 16.55 million= 4.13 million
Therefore, the accounts receivables will have to reduce by 4.1 million to achieve its goal of 40 days.
In case of any query, kindly comment on the solution.
jeff jeffy answered 6 months agoRelated Solutions
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