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Hi,
Apologies, if this already up but I haven’t been able find it.
I am currently working on Q8 on the Specimen paper for Sept 2016 exam and I have got stuck on a finance cost question. Please see below.
The management of XYZ Co has annual credit sales of $20 million and accounts receivable of $4 million. Working
capital is financed by an overdraft at 12% interest per year. Assume 365 days in a year.
What is the annual finance cost saving if the management reduces the collection period to 60 days?A $85,479
B $394,521
C $78,904
D $68,384Answer: Finance cost saving = 13/365 x $20m x 0·12 = $85,479
I incorrectly calculated this as 60/365 x 4m x 0.12. I used 60 in the absence of the the original collection period. I understand where I went wrong with the receivables value. Please can you explain where I am going wrong and where the 13 used in the answer derives from.
Thank you in advance and apologies if I am missing the obvious.
But you can (and were expected to) calculate the current receivables collection period. Currently there are receivables of 4M and sales of 20M, so the current collection period is 4/12 x 365 = 73 days.
The saving is the reduction from 73 to 60 days which is 13 days.
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