Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60." Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75% of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Suppose that Mace's sales are expected to increase by 20% next year and, through more effective collection methods, the firm can reduce its average collection period by 20 days. Determine the firm's average investment in receivables for next year under these conditions.

Question

Quizplus · Accepted Answer

The firm's sales are expected to increase by 20%, making annual sales $360 million. With a reduced average collection period of 40 days (60 - 20), the average investment in receivables is calculated as: (40/365) * $360 million = $39,452,055. However, considering the variable cost ratio, the investment in receivables is (1 - 0.75) * $39,452,055 = $9,863,014. This is incorrect, so the correct calculation should be based on the full sales amount, leading to the correct choice A.

Mace Auto Parts Company Sells to Retail Auto Supply Stores