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hi sir
i am confused in one more question…i shall be very thankful if you explain them.
Q;The management of XYZ Co has annual credit sale of $20M..and acc rec is $4M..Working capital is finaced by O.D at 12% Int/Year..Assume 365 days in a year..What the annual cost saving if management reduce the collection period by 60 days..
A:85479
B:394521
C:78904Although its loo like very easy…I solved it by using the approch you teach in lectures as compare Current and Revised rec..
But its gives the option A which is wrong according to KITThe correct ans is 2 by solving as (60/365)*20M=3287671
Finance cost saving=3287671*0.12=394521
Seriously dont understand whats going on and why my ans buy using different approch is wrong.. PLZ PLZ explain it
really thanks alot..I don’t know what you did wrong!
Current receivables are $4M and so the collection period is 4/20 x 365 = 73 days.
So the new collection period is 73 – 60 = 13 days.
Therefore the new receivables = 13/365 x 20M = $712,329So the interest saving is ($4M – $712,329) x 12% = $394,521 !!
(The difference between the receivables for 73 days and the receivables for 13 days, will be the same arithmetically as 60 days worth of sales)
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