For the year just ended, James' Drafting Supplies had average accounts receivable of $880,000 and total credit sales of $4,800,000. Throughout the year, a factor purchased accounts receivable
From the ﬁrm at a 2% discount. If the ﬁrm wishes to get its factoring costs below 11%, what is the
MAXIMUM days in receivables it can have?

Question

Quizplus · Accepted Answer

First, we need to calculate the factor's cost for James' Drafting Supplies:

Factor's cost = (Total amount of accounts receivable sold x Discount rate) / Total credit sales = ($880,000 x 0.02) / $4,800,000 = 0.0367 or 3.67%

To get the factoring cost below 11%, we need to solve for the maximum days in receivables, which is given by:

Maximum days in receivables = Factor's cost / (1 - Factor's cost) x (365 / Receivables turnover)

Receivables turnover = Total credit sales / Average accounts receivable = $4,800,000 / $880,000 = 5.45

Plugging in the numbers:

Maximum days in receivables = 0.0367 / (1 - 0.0367) x (365 / 5.45) = 70.02 or approximately 70 days

Therefore, the best choice is B, with a maximum of 70 days in receivables to get the factoring costs below 11%.

For the Year Just Ended, James' Drafting Supplies Had Average