house corporation makes credit sales of 2160 000 per annum. the average age of accounts receivable is 30 days. management considers shortening credit terms by 10 days. cost of money is 18% assume 360 day year
how much will the company save from financing
240000
how did u get 240000? kindly show your solution please. thank you.
To calculate how much the company will save from financing by shortening the credit terms, we need to determine the interest cost the company incurs on the outstanding receivables.
Step 1: Calculate the average daily credit sales
To calculate the average daily credit sales, divide 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
Average daily credit sales = $2,160,000 / 360 = $6,000
Step 2: Calculate the reduction in the average age of accounts receivable
Since the management wants to shorten the credit terms by 10 days, the reduction in the average age of accounts receivable will also be 10 days.
Step 3: Calculate the reduction in outstanding receivables
To calculate the reduction in outstanding receivables, multiply the average daily credit sales by the reduction in the average age of accounts receivable.
Reduction in outstanding receivables = Average daily credit sales x Reduction in average age of accounts receivable
Reduction in outstanding receivables = $6,000 x 10 = $60,000
Step 4: Calculate the interest cost savings
The interest cost savings will be equal to the reduction in outstanding receivables multiplied by the cost of money and divided by the number of days in a year.
Interest cost savings = (Reduction in outstanding receivables x Cost of money) / Number of days in a year
Interest cost savings = ($60,000 x 18%) / 360 = $300
Therefore, the company will save $300 from financing by shortening the credit terms by 10 days.