Milwaukee Surgical in Order to Calculate the Essay

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Milwaukee Surgical

In order to calculate the average collection period for Milwaukee Surgical Supplies, a weighted average should be taken of the times when customers are paying. In this case, 30% of the customers pay on the tenth day, 40% of the customers pay on the 30th day, and 30% of the customers pay on the 40th day. The weighted average formula would therefore look as follows:

Average collection period = (.3)(10) + (.4)(30) + (.3)(40)

ACP = 3 + 12 + 12 = 27 days

To calculate the firm's current receivables balance, the annual sales must be broken down to daily sales, and then this figure would be multiplied by the average collection period. The first step assumes 360 days, and the company's annual sales are $1,200,000.

(1,200,000) / 360 = $3,333.33 in sales per day.

Then this is multiplied by the 27 day average collection period:

(3333.33)*(27) = $90,000

Thus, the current receivables balance for Milwaukee Surgical Supplies is $90,000.

If Milwaukee Surgical Supplies toughened up its collection policy such that all non-discount customers paid on the 30th day, then the weightings used to calculate the average collection period would change.

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The new weightings would retain the 30% of customers who paid on the 10th day to get the discount, and the other 70% of customers would all pay on the 30th day:

(.3)(10) + (.7)(30) = ACP

ACP = 3 + 21 = 24 days

The average collection period would be 24 days if Milwaukee Surgical Supplies tightened its collections, a drop of three days over the previous rate.

4. In order to determine the savings from the tightening of the collections policy, the carrying cost under the old policy must be compared with the carrying cost under the new policy. Under the old policy, the average level of receivables was $90,000, which costs the company (90,000)(.08) = $7,200 over the course of the year.

The second step is to calculate the new average receivables level, which would be as follows:

$3,333.33 * 24 = $80,000

So the average receivables level is $10,000 less than it was before. The carrying cost of the new receivables level is:

$80,000 * .08 =$6,400.

The savings therefore will be.....

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