Question

?(Efficiency analysis) ALei Industries has credit sales of $ 146 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 60 ?days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 40 ?days?

a. What is the maximum level of accounts receivable that ALei can carry and have a 40?-day average collection? period? The maximum level of accounts receivable will be ?$____million.???(Round to one decimal? place.)

Answer 1

Average collection period = (Accounts Receivable / Credit sales) x 365 days

a) Average collection period = 40 days

or, (Accounts Receivable / $146 million) x 365 days = 40 days

or, Accounts receivable / $146 million = 40 / 365

or, Accounts receivable = $146 million x 40 / 365 = $16.0 million

b) Average collection period = 60 days

or, (Accounts receivable / $146 million) x 365 days = 60 days

or, (Accounts receivable / $146 million) = 60 / 365

or, Accounts receivable = $146 million x 60 / 365 = $24.0 million

Reduction in Accounts receivable required = $24.0 million - $16.0 million = $8.0 million