Question

(Efficiency analysis) ALei Industries has credit sales of $160 million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of 45 days.

 a. What is the maximum level of accounts receivable that ALei can carry and have a 45-day average collection period?

 b. If Alei's current accounts receivable collection period is 60 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 45 days?

 a. What is the maximum level of accounts receivable that Alei can carry and have a 45-day average collection period? 

The maximum level of accounts receivable will be $_______  million. (Round to one decimal place.)

Answer 1

a) Calculation of the account receivables if average collection period is 45 days :-

Maximum account receivables if collection period is 45 days = credit sales * 45 / 365

= 160 million *45 / 365 = 19.726027 millions

Maximum account receivables if collection period is 45 days = 19.7 millions

b) How much it reduce to achieve it goal :-

account receivables if collection period is 60 days = 160 millions * 60 / 365 = 26.3013699 millions

Maintainable account receivables to reach its goal that is 45 days =19.726027 millions (calculated in part a)

Amount to be reduce in account receivables to reach its goal = 26.3013699 millions - 19.726027 millions = 6.575342466 millions

Amount to be reduce in account receivables to reach its goal = 6.6 millions