1. Compute the current average collection period based on the data in Table 1. In doing this, multiply the midpoint of the days outstanding, by the weight assigned to that category. For example, the midpoint of the second company is 15 days and the category represents 7.5 percent of total accounts receivable ($150,000/$2,000,000). Its value is 1.125 days (15 days .075). After this process is followed for all six categories, add up the total to get the average collection period.

2. Compute the new average collection period based on the terms in Table 2 and the results of the pilot study. Use the simplifying assumption that under the new policies all customers will all pay at the end of the 10^th day or the end of the 30^th day.

i.e., for the 1/10, net 30

10% 10 days = 1 day

90% 30 days = 27 days

28 days average collection period

3. Assuming average daily credit sales remain at $54,274 per day, what will be the new accounts receivable balance based on the three new cash discount policies?

Accounts receivable = average collection period average daily credit sales

4. Compute the cost of the cash discount based on the three policies under consideration. Recall that total credit sales were $18 million.

Multiply total credit sales times the percent that use the discount for each new discount policy times the size of the discount.

Table 1. Accounts Receivables Outstanding, December 20XX Table 2. New Terms for Cash Discounts