A firm sells on terms of 2/10 net 60. It sells 1,000 units per day at a unit price of $10. On 60% of sales, customers take the cash discount. On the remaining 40% of sales, customers pay, on average, in 70 days. What would be the impact on the balance of accounts receivable if the firm initiates a more aggressive collection policy and is able to reduce the average payment period to 60 days for those customers not taking the cash discount? (Assume sales levels are unaffected by the change in policy.)
A. Decrease by $280,000
B. Decrease by $4,000.
C. Decrease by $40,000.
D. Decrease by $240,000.
Answer:C
C is corrent. On the 40% of sales to customers not taking the cash discount, a 10-day reduction in the average collection period will reduce the accounts receivable balance as follows: .4 x Daily unit sales x Unit price x Reduction in days outstanding = .4 x 1,000 x $10 x 10 = $40,000.
A is incorrect. This is the total balance of accounts receivable under the old collection policy: .4 x Daily unit sales x Unit price x Average collection period = .4 x 1,000 x $10 x 70 days = $280,000.
B is incorrect. This solution does not multiply the unit sales volume by the price per unit and calculates the reduction in account receivable as: .4 x Daily unit sales x Reduction in days outstanding = .4 x 1,000 x 10 = $4,000.
D is incorrect. This is the total balance of accounts receivable under the new collection policy: .4 x Daily unit sales x Unit price x Average collection period = .4 x 1,000 x $10 x 60 days = $240,000.