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A company has the following budgeted sales figures:
Month 1 $90,000
Month 2 $105,000
Month 3 $120,000
Month 4 $108,000
80% of sales are on credit and the remainder are paid in cash. Credit customers paying in
the month after sale are given a discount of 1.5%. Credit customers normally pay within the
following time frame:
1 month after sale 40% of credit sales
2 months after sale 70% of credit sales
3 months after sale 98% of credit sales
There is an expectation that 2% of credit sales will become irrecoverable debts.
What are the expected total receipts in month 4?The answer is this:
Month 4 $108,000 × 20% 21,600
Month 3 $120,000 × 80% × 40% × 0.985 37,824
Month 2 $105,000 × 80% × 30% 25,200
Month 1 $90,000 × 80% × 28% 20,160
Total receipts 104,784My questions are
1. How did the 30% occur on month 2? Why not 70%
2. On month 1, again why 28% instead of 98%?
3. Where is the 2% irrecoverable costs calcuated?
Thanks!
1. 70% pay within 2 months after sale. That means that is the % who pay in either 1 month or 2 months. Since 40% pay within 1 month, it must mean that the remaining 30% pay in 2 months.
2. The same logic. 98% pay within 3 months (so take 1, 2, or 3 months). 70% pay within 2 months and so the remaining 28% must take 3 months.
3. The fact that there are 2% irrecoverable is why only 98% of credit sales end up being received. The remaining 2% not counted because there is no cash receipt.
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