Case 27

1. For this question, ignore the forecasted receivables collection pattern in Exhibit 27.4. Using paper and pencil (do NOT use the template), calculate the projected ACP and average daily sales (ADS) under the following conditions:
30% of customers pay on the 10th day
50% of customers pay on the 30th day
20% of customers pay on the 60th day
800,000 units sold per year @ $5 per unit = $4,000,000/360
Remember, since there are no balance sheets or operating statements, you will have to MANUALLY calculate the ACP. Just look at the numbers: 30% pay after 10 days + 50% pay after 30 days + 20% pay after 60 days. What’s the average? Voila! Also, for consistency, use 360 days = one year

Answer: ADS= $11,111 ACP= 33 days

2. Given your answers to #1, what is the projected average receivables level on any given day? (HINT: Formula is ACP x ADS)

Answer: $366,663

3. Given your answer to #2, and assuming a contribution margin of 20% and short term bank loans of 10% cited in the case study, what would the firm’s balance sheet look like for accounts receivable and notes payable accounts at the end of the year if notes payable are used to finance the investment in receivables? (HINT: A/R on the assets side; notes payable and ? on the other side of the ledger. ANOTHER HINT: What is another name for contribution margin on the balance sheet [i.e., where do the profits show up on a balance sheet]? This is a short answer, not complicated. Only three accounts involved.)

Answer

4. Based on the conditions in #3, what is the projected annual cost of carrying the receivables? (HINT: This, too, is simple.)

Answer: $53,808

5. Input data into the template using data from Exhibit 27.1 and 27.2; the collection pattern presented in Exhibit 27.4; and the data found on p 202. Now:
What would be the receivables levels at the end of March and