Question

Jaxon Markets currently has credit terms of net 30, an average collection period of 29 days, and average receivables of $211,410. The firm estimates that if it offered terms of 2/10, net 30 that 45 percent of its customers would pay on day 10 with the remainder paying on average in 32 days. How much cash could the company free up from its accounts receivables if it switched its credit policy? Group of answer choices $38,762 $65,009 $58,336 $64,219 $50,301

Answer 1

Answer: $50,301

Explanation:

If they offered the new terms of 2/10, net 30 then 45 percent of their customers would pay on day 10 with the remainder paying on average in 32 days.

The collection period would therefore be;

= 0.45 * 10 + 0.55 * 32

= 22.1 days

Currently the Average Daily sales are;

= Average Receivables/ Average collection period

= 211,410/29

= $7,290

With the new collection period their Average receivables would be;

= 7,290 * 22.1

= $‭161,109‬

Potential cash to be freed up = Current Receivables - New receivables

= 211,410 - 161,109

= $50,301