Silly Sally, Inc.
Silly Sally, Inc. forecasts the following sales levels: January, $420; February, $435; March, $450; and April, $470. Historically, 40% of its sales are for cash. Of the remaining sales, 80% are collected in one month, 15% are collected in the second month, while the rest remain uncollected. November sales were $380 and December sales were $500. (all values $000)
Purchases are made at 60% of the next month's sales forecast, and are paid for in the month of purchase. Other cash outlays are: rent, $10 monthly; wages and salaries, $50 monthly; a tax payment of $30 in March; an interest payment of $15 in March; and a planned purchase of $20 of new fixed assets in January.
-Suppose Silly Sally experiences a change in customer payment patterns in accounts receivable,so that payments are now 30% in cash,and of the credit sales,60% are collected in one month,35% are collected in the second month,with the rest uncollected.What is the new forecasted collection for January,and how much is this different from the original forecast?

Question

Quizplus · Accepted Answer

Using the original customer payment pattern, the forecasted cash collection for January would be:
January Sales = $420
40% of January Sales collected in cash = $420 x 0.4 = $168
60% of credit sales collected in the following month = $420 x 0.6 = $252
15% of credit sales collected in the second month = $420 x 0.15 = $63
Uncollected credit sales = $420 - $168 - $252 - $63 = $37

Total cash receipts in January = $168 + $252 = $420
Cash collections are the same regardless of the customer payment pattern.

Using the new customer payment pattern, the forecasted collection for January would be:
January Sales = $420
30% of January Sales collected in cash = $420 x 0.3 = $126
60% of credit sales collected in the following month = $420 x 0.6 = $252
35% of credit sales collected in the second month = $420 x 0.35 = $147
Uncollected credit sales = $420 - $126 - $252 - $147 = -$105

Since there is negative uncollected credit sales, we assume it to be $0.

Total cash receipts in January = $126 + $252 = $378

The difference between the two forecasted cash collections is $420 - $378 = $42, but the question asks for the difference in forecasted collections, not actual collections. The difference between the two forecasts is $429 - $378 = $51, or $13 lower than the original forecast. Therefore, the correct answer is D.

Silly Sally, Inc. Silly Sally, Inc. Forecasts the Following Sales Levels: January, $420;