Question

ALei Industries has credit sales of $140 million a year. ALei’s management reveiwed its credit policy and decided that it wants to maintain an average collection period of 365 days.

A. What is the maximum level of accounts receivable that ALei can carry and have a 35-day average collection period?

B. If ALei’s current accounts receivable collection period is 60 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 35 days?

Answer 1

Average collection period = 365/credit sales*Average reveivable  
35 = 365/140000000*Average reveivable  
35*140000000/365=   Average receivables
Average receivables=   13424657.53
  
So maximum level of Accounts receivables Alei industries can carry is   $13,424,657.53
  
Current average collection period=   60

60= 365/140000000*average collection period
So Current average receivables =   60*140000000/365
23013698.63  

Reduction in receivables required = Current receivables - Required receivables  
23013698.63 -13424657.53
=9589041.096  
  
So average receivables required to be reduced is   $9,589,041.10