Drake Paper Company sells on terms of net 30. The firm's variable cost ratio is 0.80.
a. If annual credit sales are $20 million and its accounts receivable average 15 days overdue, what is Drake's investment in receivables?
b. Suppose that, as the result of a recession, annual credit sales decline by 10 percent to $18 million, and customers delay their payments to an average of 25 days past the due date. What will be Drake's new level of receivables investment?
This solution provides a detailed a computation of the given accounting problem.