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    Investment in receivables

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    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?

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    Solution Preview

    a. The amount of receivables = Per Day Sales X Average collection period
    Per day sales = 20,000,000/365 = 54,794.52
    Average collection period = 30 days given + 15 days overdue = 45 ...

    Solution Summary

    The solution explains how to calculate the investment in receivables.