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 a 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?
|Net credit sales in millions||151|
|Average collection period||40||days|
|Average collection period = 365 / Net credit sales * Average Accounts recievable|
|40 =||365 / 151000000 * Average Accounts receivable|
|Average Accounts receivable =||16547945.2|
|when Average collection period is 50 days, the Average Accounts receivable is as under:|
|Average Accounts receivable = 50*151000000/365 = 20684931.5|
|Reduction in Accounts receivable required = 20684931 - 16547945 = $ 4136986|
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