The Milton Company currently purchases an average of $22,000 per day in raw materials on credit terms of “net 30.” The company expects sales to increase substantially next year and anticipates that its raw material purchases will increase to an average of $25,000 per day. Milton feels that it may need to finance part of this sales expansion by stretching accounts payable.
a. Assuming that Milton currently waits until the end of the credit period to pay its raw material suppliers, what is its current level of trade credit?
b. If Milton stretches its accounts payable an extra 10 days beyond the due date next year, how much additional short-term funds (that is, trade credit) will be generated?