Garcia Industries has sales of $167,500 and accounts receivable of $18,500,and it gives its customers 25 days to pay.The industry average DSO is 27 days,based on a 365-day year.If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average,and if it earns 8.0% on any cash freed-up by this change,how would that affect its net income,assuming other things are held constant? Assume all sales to be on credit.Do not round your intermediate calculations.

Question

Quizplus · Accepted Answer

DSO (Days Sales Outstanding) = (Accounts Receivable / Annual Credit Sales) * 365 days
DSO for Garcia Industries = (18,500 / 167,500) * 365 days = 40.42 days

To reduce DSO to the industry average of 27 days, Garcia Industries needs to collect its accounts receivable faster by 40.42 - 27 = 13.42 days.

The amount of cash that would be freed up = (13.42 / 365) * $167,500 = $6,153.11

If the company earns 8.0% on this amount, the increase in net income would be:
$6,153.11 * 0.08 = $492.25

Therefore, option C is the correct answer: $488.77, which is the closest answer to $492.25 after rounding.

Garcia Industries Has Sales of $167,500 and Accounts Receivable of $18,500,and