Question

A study of Brown Bag Company's payment practices showed that the company pays its vendors 20...

A study of Brown Bag Company's payment practices showed that the company pays its vendors 20 days after the accounting department receives the invoice. The standard deviation is 5 days. Assuming that there is a normal distribution across the company's payments, what percent of the invoices are paid within 15 days of receiving them? Based on your answer, recommend an effective payment strategy for the company.

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Answer #1
Particulars Amount
Expected Value 15.000
Mean Value 20.000
SD 5.000

Z = [ Expected Value - Mean Value ] / SD
= [ 15 - 20 ] / 5
= [ -5 ] / 5
= -1

NT ( Z ) = NT (-1 )
= 0.1587
I.e 15.87%

% of Invoices paid in 15 days is 15.87%

Efeective decision strategy specifies when the due shall be cleared considering other factors such as opportunity cost & Cash discount.

If Cash Discount > Bank Int, It is adviced to pay before due date and avaial the cash dicount and vice versa.

If Bank Int > Int posed by creditor, It is advied to delay even after due date and postpone the payments as such as possible.

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