Binder Inc's credit sales are projected to be $11,680,000 for the year. The company collects its receivables over an average period of 50 days and finances them by borrowing on its bank line of credit at an interest rate of 9%. Management has determined that if it hires another clerk in the receivables department at $32,000 per year, it can reduce average days outstanding for the receivables to 30, the industry average. What should Binder Inc do?

Question

Quizplus · Accepted Answer

First, we need to calculate the interest cost for financing credit sales.

Interest cost = Credit sales x Interest rate x Time

Time = Average days outstanding / 365

Time for current system = 50/365 = 0.137

Interest cost for current system = $11,680,000 x 0.09 x 0.137 = $143,170

Time for new system = 30/365 = 0.082

Interest cost for new system = $11,680,000 x 0.09 x 0.082 = $90,384

Savings from hiring a new clerk = Interest cost for current system - Interest cost for new system - Salary of new clerk

= $143,170 - $90,384 - $32,000

= $20,786

Therefore, hiring a new clerk will result in a net savings of $20,786.

Option B is the only answer that matches the calculated net savings.

Binder Inc's Credit Sales Are Projected to Be $11,680,000 for the Year