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?
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 ...
The solution explains how to calculate the investment in receivables.