ACP and Receivables Turnover Ya'll-Who, Inc., has an average collection period of 61 days. Its average daily investment in receivables is $40,000. What are annual credit sales? What is the receivables turnover? Size of Accounts Receivable Essence of Skunk Fragrances, Ltd., sells 3,000 units of its perfume collection each year at a price per unit of $400. All sales are on credit with terms of 2/10, net 30. The discount is taken by 50 percent of the customers. What is the amount of the company's accounts receivable? In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 4/10, net 30 to preserve its market share. How will this change in policy affect accounts receivable? Size of Accounts Receivable The Staind Corporation sells on credit terms of net 20. Its accounts are, on average, 12 days past due. If annual credit sales are $6 million, what is the company's balance sheet amount in accounts receivable? Evaluating Credit Policy Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. Anew customer has placed an order for 10 high-bypass turbine engines, which increase fuel economy. The variable cost is $1.4 million per unit, and the credit price is $1.8 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 200 such orders is never collected. The required return is 3 percent per period.

a. Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended.

b. What is the break-even probability of default in part (a)?

c. Suppose that customers who don't default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. Should the order be filled? What is the break-even probability of default?

d. Describe in general terms why credit terms will be more liberal when repeat orders are a possibility.

Credit Policy Evaluation Ebbert, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Ebbert should proceed or not. Describe the buildup of receivables in this case. The required return is 1.5 percent per month.


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