Note: When converting annual data to daily data or vice versa in these problems, assume there are 365 days per year.
Problem
Drake Paper Company sells on terms of “net 30”. The firm’s variable cost ratio is 0.80.
a. If annual credit sales are $20 million and its accounts receivable average is 15 days overdue, what is Drake’s investment in receivables?
b. Suppose that, as the result of a recession, annual credit sales decline by 10 percent to $18 million, and customers delay their payments to an average of 25 days past the due date. What will be Drake’s new level of receivables investment?