Question

The financial manager of Hlope Manufacturing Ltd observed that 35% of their customers pay on 12th day and take advantage of their terms of 2/15, net 45. The other 65% pay, on average, 45 days after their purchases. Hlope Manufacturing Ltd total sales for the year amounted to R3 500 000 (assume a 360-day year and that all sales are on credit).

a) Calculate the company's accounts receivable period

b) What would happen to the average receivables if Hlope Manufacturing Ltd relaxed its collection policy with the result that all non-discount customers paid on the 50th day?

Answer 1

a) Company's accounts receivable period=

Weighted average no.of days

ie.(35%*12 days)+(65%*45 days)=

33.45

days

ie. Average accounts receivables=3500000/360*33.45= $   325208

b) If all non-discount customers paid on the 50th day

Company's accounts receivable period will become

(35%*12 days)+(65%*50 days)=

36.7

days

Now the

average accounts receivables will be

3500000/360*36.7=

356806

Accounts receivables balance will increase by 356806-325208=

31598