Question

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.

Answer 1

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

30. 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.

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