Task: Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000 and the collections department estimates that 30% of the customers pay on the tenth day and take discounts, 40% pay on the thirtieth (30th) day, and remaining 30% pay, on average, 40 days after the purchase. (Assume 360 days /year.)
Question 1. Calculate the firm's average collection period.
Question 2. Calculate the firm's current receivables balance.
Question 3. Calculate 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.
Question 4. Assuming the cost to the firm to carry receivables is 8% per annum, calculate the annual savings resulting from the toughened credit policy. (Assume the entire amount of receivables had to be financed.)