Vanity Press, Inc. has annual credit sales of $1.6 million and a gross profit margin of 35 percent.
A. if the firm wishes to maintain an avearage collection period of 50 days, what level of accounts receivables should it carry? Assume a 365 day year
To calculate the level of accounts receivables that Vanity Press, Inc. should carry, we need to use the formula:
Accounts Receivables = (Average Daily Credit Sales) x (Average Collection Period)
First, let's calculate the average daily credit sales. We can do this by dividing the annual credit sales by the number of days in a year:
Average Daily Credit Sales = Annual Credit Sales / Number of Days in a Year
Given that the annual credit sales are $1.6 million and the year has 365 days, we have:
Average Daily Credit Sales = $1,600,000 / 365
Next, we need to calculate the average collection period in terms of days. Since the firm wishes to maintain an average collection period of 50 days, we can simply use that value directly:
Average Collection Period = 50 days
Finally, we can calculate the level of accounts receivables using the formula mentioned earlier:
Accounts Receivables = (Average Daily Credit Sales) x (Average Collection Period)
Accounts Receivables = (1,600,000/365) x 50
Simplifying the calculation, we get:
Accounts Receivables = $21,917.81
Therefore, Vanity Press, Inc. should carry approximately $21,917.81 in accounts receivables in order to maintain an average collection period of 50 days.