Question

Lei Industries has credit sales of $143 million a year. ​ A Lei's management reviewed its credit policy and decided that it wants to maintain an average collection period of 45 days.

a.  What is the maximum level of accounts receivable that A Lei can carry and have a 45​-day average collection​ period?

b.  If​ A Lei's current accounts receivable collection period is 55 ​days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of

45 days?

Answer 1

A.

Step 1

Calculation of Account receivable turnover ratio(ARTR)

ARTR in days = 360 / ARTR

45 = 360 / ARTR

ARTR = 360 / 45 = 8%

.

Step 2

Calculation of Account receivable turnover ratio(ARTR)

ARTR = credit sale / average account receivable

8% = 143000000 / average account receivable

.

Average account receivable = 143000000 / 0.08 = 1787500000

.

B.

Calculation of Account receivable turnover ratio(ARTR)

ARTR in days = 360 / ARTR

55 = 360 / ARTR

ARTR = 360 / 55 = 6.54%

.

Step 2

Calculation of Account receivable turnover ratio(ARTR)

ARTR = credit sale / average account receivable

6.54% = 143000000 / average account receivable

.

Average account receivable = 143000000 / 0.0654 = 2186544342

Reducing level of Account receivable = 2186544342 - 1787500000 = 399044342

Reducing level of Account receivable = 399044342