Milwake Surgical Supplies, Inc.

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Assignment No. 5 - Milwaukee Surgical Supplies, Inc. Marinella M. Ojeda Dr. Michelle Rose Healthcare Finance December 11, 2011 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 day, and remaining 30% pay, on average, 40 days after the purchase. (Assume 360 days/year). 1. What is the firm average collection period? Average collection formula: (Gapenski, 2008 pg.536) 30% pay on the 10 and take discount 40% pay on the 30 30% pay average 40 ACP = (0.3 x 10 days) + (0.4 x 30 days) + (0.3 x 40 days) 3 + 12 + 12 = 27 days 2. Calculate the firm’s current receivables balance Receivables balance = ADB x ACP, where ADB = Average Daily Billing. I got the ADB dividing the Gross sales by the 360 days: $1,200.000 / 360 = $3,333.33 Receivables balance = $3,333.33 x 27 = $89,999.91 3. Calculate the firm’s new receivable if Milwaukee Surgical toughened up on its collection policy, with the result that all non-discount customer paid on the 30th day. 30% pay on the 10 and take discount 70% pay on the 30 ACP = (0.3 x 10 days) + (0.7 x 30 days) 3 + 21 = 24 days Receivables balance = ADB x ACP Receivables balance = $3,333.33 x 24 = $79,999.92 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). Over a year the firm must pay to the bank: 0.08 x $79,999.92 = $6,399.99 in interest to carry its receivables balance. Now: $80,999 – $79,999 = $10,000 x 0.08 = $800 With

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