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- This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.
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- May 31, 2021 at 3:44 am #622354
Hello Sir,
I was working on extension of credit and the below question is from BPP study kit:
Enticement Co currently expects sales of $50,000 a month. Variable costs of sales are $40,000 a month
(all payable in the month of sale). It is estimated that if the credit period allowed to accounts receivable
were to be increased from 30 days to 60 days, sales volume would increase by 20%. All customers would
be expected to take advantage of the extended credit. If the cost of capital is 12.5% a year, is the extension
of the credit period justifiable in financial terms?
My question : How did they calculated Accounts receivable after implementing the proposal (2 months) – 120,000
My calculation : 60*60,000/360 = 10,000
Isnt it should be calculated like in the above example of the page in the book as in that they calculate it for Average inventory and subtracted it with current avg inventory , why there is a different approach followed here ?May 31, 2021 at 8:34 am #622385You have calculated the daily sales by dividing the monthly sales (60,000) by the number of days per year (360).
You should have divided the yearly sales (12 x 60,000) by the 360 days in the year, and then you would get the same answer as the book 🙂
May 31, 2021 at 3:46 pm #622461Oh yeah! I get it now… I missed the monthly word.. Thank you for clearing up 🙂
June 1, 2021 at 7:22 am #622539You are welcome 🙂
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