Milwaukee Surgical Supplies Inc. sells on terms on terms of 3/10, net 30. Gross sales for the year are $1,200,000, and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts, 40 percent pay on the thirteenth day, and the remaining 30 percent pay, on average, 40 days after the purchase. (Assume 360 days per year.)
1. What is the firm’s average collection period?
2. What is the firm’s current receivables balance?
3. What would be the firm’s new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customers paid on the 30th day?
4. Suppose that the firm’s cost of carrying receivables was 8 percent annually.
How much would the toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire amount of receivables had to be financed.)