Question

A firm currently has annual credit sales of $912,500 for which the average collection period is...

A firm currently has annual credit sales of $912,500 for which the average collection period is 30 days. If, in response to allowing the average collection period to increase to 40 days, sales increased by 10 percent, what would be the additional investment in accounts receivable?

A. $26,800.

B. $35,000.

C. $26,000.

D. None of the above.

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Homework Answers

Answer #1

Answer:B. $35,000.

Average collection period = 365 / (Sales / Accounts Receivable)

30 Days = 365 / (912500 / Accounts Receivable)

Accounts Receivable = 75000

If, in response to allowing the average collection period to increase to 40 days, sales increased by 10 percent, what would be the additional investment in accounts receivable?

Average collection period = 365 / (Sales / Accounts Receivable)

40 Days = 365 / (1003750 / Accounts Receivable)

Accounts Receivable = 110000

Additional Investment = 110000 - 75000 = 35000

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