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Annual sales of the X enterprise total $ 50,000. If the business with an average collection...

Annual sales of the X enterprise total $ 50,000. If the business with an average collection time of 45 days reduces the average collection time to 30 days, how much will the credit level change? (1 year 365 days)
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Answer #1

Average Collection Period= 365/Receivable Turnover Ratio

Receivable Turnover Ratio = Credit sales/Average receivables.

Credit sales/Average receivables= 365/Average Collection Period

Therefore,

Average Receivables= Credit Sales*Average Collection Period/365

Given,

Sales=$50,000. Average collection period now= 45 days and proposed=30 days.

Assuming that the entire sales is on credit and substituting these values,

Average receivables now= $50,000*45/365 = $6,164.38

Average receivables proposed= $50,000*30/365 =$4,109.59

Change in credit level= $6,164.38 - $4,109.59 = $2,054.79

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