Melton Electronics currently has an average collection period of 35 days and annual sales of $72 million. Assume a 365-day year.
a. What is the firm’s average accounts receivable balance?
b. If the variable cost of each product is 70% of sales, what is the firm’s average investment in accounts receivable?
c. If the equal-risk opportunity cost of the investment in accounts receivable is 16%, what is the total annual cost of the resources invested in accounts receivable?
d. Suppose that Melton can shorten the average collection period to 30 days by offering a cash discount of 1% for early payment, and 60% of the customers take this discount. Should the firm offer this discount? Assume that its cost of bad debts will rise by $150,000 per year.

  • CreatedMarch 26, 2015
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