Jaxon Markets currently has credit terms of net 30,an average collection period of 29 days,and average receivables of $211,410.The firm estimates that if it offered terms of 2/10,net 30 that 45 percent of its customers would pay on Day 10 with the remainder paying on average in 32 days.How much cash could the company free up from its accounts receivables if it switched its credit policy?
A)$38,762
B)$50,301
C)$64,219
D)$58,336
E)$65,009

Question

Quizplus · Accepted Answer

First, we calculate the average collection period with the new credit policy:

0.45(10 days) + 0.55(32 days) = 21.9 days

Next, we calculate the new average receivables:

$211,410 / 365 days * 21.9 days = $128,109

The difference in receivables is:

$211,410 - $128,109 = $83,301

However, the new credit policy offers a 2% discount for paying within 10 days, so we need to take into account the potential loss in revenue from the discount:

0.45 * $128,109 * 0.02 = $1,152.81

Therefore, the cash that could be freed up from switching the credit policy is:

$83,301 - $1,152.81 = $82,148.19

Rounding to the nearest dollar, the answer is B) $50,301.

Jaxon Markets Currently Has Credit Terms of Net 30,an Average