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Hello John,
Could you please assist me with the following question?
Sales for 20×5 is $1600000; cost of capital is 10%
During the period up to and including 20×5, the expected receivables period has been maintained. However, by 20×5, the actual business proportion of sales has grown from 50% to 60%. Credit periods are as follows; 40 of customers take 1 month’s credit, 40% of customer take 2 months credit and 20% of customers take 3 months credit.What is the annual cost of financing 20×5 receivables?
1.The anwer is $14400.
2. Could you please help me to obtain the answer? The working the kit is a bit complicated to understand?Thanks.
If you have copied out the question exactly, then it is a very badly worded question.
It would however seem that the sales for 20X5 are 60% x $1.6M = $960,000.
From then on it is exactly as I explain in my free lectures:
The average credit period is 1.8 months.
Therefore the average receivables are 1.8/12 x $960,000 = $144,000Therefore the cost of financing is 10% x $144,000 = $14,400 per annum.
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