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16.5 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 percent of the customers pay on the tenth day and take discounts, 40 percent pay on the thirtieth day, and the
remaining 30 percent pay, on average, 40 days after the purchase.
(Assume 360 days per year.)
a. What is the firm’s average collection period?
b. What is the firm’s current receivables balance?
c. What would be the firm’s new receivables balance if Milwaukee
d. Suppose that the firm’s cost of carrying receivables was 8 per-
cent annually. How much would the toughened credit policy
save the firm in annual receivables carrying expense? (Assume
that the entire amount of receivables had to be financed.)
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