Whirlwind Company sells to retail appliance stores on credit terms of net 30. Annual credit sales are $182,500,000 spread evenly throughout the year, and its accounts average 20 days overdue. The firm's variable cost ratio is 0.70. Determine Whirlwind's average investment in receivables. (Assume 365 days per year in all calculations.)

Question

Quizplus · Accepted Answer

First, we need to determine the daily credit sales:
$182,500,000 / 365 = $500,000
Next, we need to determine the average collection period:
Net 30 terms means that customers have 30 days to pay.
20 days overdue means that customers are paying, on average, 50 days after the sale (30 days + 20 days).
So, the average collection period is 50 days.
Finally, we can calculate the average investment in receivables:
Average investment in receivables = (Average daily credit sales) x (Average collection period)
Average investment in receivables = $500,000 x 50 days = $25,000,000
Therefore, the answer is B.

Whirlwind Company Sells to Retail Appliance Stores on Credit Terms