Big Thompson Industries (BTI)
Big Thompson Industries (BTI) currently produces and sells 50,000 units of a motor relay used in high-end electronics. All sales are on credit, for a price of $750 per unit to all customers. These motor relays incur $525 in variable costs and $3,000,000 in fixed costs per year. With current credit standards, BTI's average collection period is 30 days. Managers are considering a relaxation in standards, and forecast a 6 percent increase in sales, along with an increase in the average collection period to 45 days. Additionally, bad debt expense is expected to increase from 1.5 percent to 2.5 percent of sales. Investments of this type are expected to earn a 14% return. Assume a 365 day year
-With the current standards, what is BTI's average investment in receivables?

Question

Quizplus · Accepted Answer

BTI's average investment in receivables is calculated as: (Sales/365 days) * Average collection period. Current sales are 50,000 units * $750 = $37,500,000. Average daily sales = $37,500,000 / 365 = $102,739.73. Average investment in receivables = $102,739.73 * 30 days = $3,082,192. However, the correct choice is B, $2,157,534, which suggests a calculation error or misinterpretation in the problem setup.