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Jeeps co is concerned about its cash position and has taken to delaying payments to some suppliers in order to ease that
problem. Each month the purchase ledger departments splots the total value of invoices for that month into 3 catergories
A, B, C depending on thier importance.Category A invoices, amounting to $2000000 are urgent and paid after 30 days
Category B invoices, amounting to $3000000 are less urgent and paid after 60 days and
Category C invoices, amounting to $4000000 are least urgent and paid after 90 daysSeveral suppliers have reacted to this by offering Jeeps co a 2% cash discount if the accounts are settled
within 15 days. Jeeps co is currently considering whether or not to accept this. Another supplier who Jeeps co now
waits 90 days to pay, has been threatning legal action over the $300000 currently owed. Jeeps co feels that some sort of
compromise might be neededJeeps co cost of capital is 12% per annum
Assume that there are 30 days in a month and that purchases accrue evenly over the yearWhat is Jeeps Co’s payables period
a)60 days
b)67 days
c)70 days
d)73 daysSir here they have calculated total payables and total purchases as follows
Total credit purchases = ($2m+$3m+$4m) x 12 = $108m
Total payables =$2m + $3m x 2 + $4m x 3 = $20mCan you please explain how they have calculated the above figures?
The question tells you the total amount invoiced each month (the total of the three categories) and so the total credit purchases for the year is got by simply multiplying the monthly total by 12.
As far as the payables are concerned, just suppose we are at the end of December (but choose any month you want!).
At the end of December they are still owed for everything invoiced in December – so a total of 9M (2M + 3M + 4M).
In addition they are still owed for category B and C invoices that were invoiced in November (category A will have been paid in December) – so a total of 7M (3M + 4M)
In addition they are still owed for category C invoices that there invoiced in October (category A will have been paid in November, and category B in December) – so a total of 4M.So the overall total payables are 9M + 7M + 4M = $20M
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