Miller & Miller sells earnings forecasts for Chinese securities. Its credit terms are 1/5, net 15. Based on experience, 75 percent of all customers take the discount. What is the average collection period?

Question

Quizplus · Accepted Answer

The credit terms of 1/5, net 15 mean that customers can take a 1% discount if they pay within 5 days, otherwise the full amount is due in 15 days.
Given that 75% of the customers take the discount, we can assume that they pay within 5 days. Therefore, the remaining 25% of customers pay the full amount within 15 days. 
Assuming a 365-day year, the average collection period can be calculated as:
(75% x 5 days) + (25% x 15 days) = 3.75 days + 3.75 days = 7.5 days. 
Therefore, the answer is D) 7.5 days.

Miller & Miller Sells Earnings Forecasts for Chinese Securities