Calculate the average collection period

Reference no: EM13291908

You work for a company that extends trade credit to customers. Currently your variable cost ratio is 65% and the annual rate of interest set by the company is 4% and the terms are a 30-day net. It costs you $0.07 on the dollar for administrative costs.

Your monthly credit extension is $400,000 and you know (based on previous calculations) that 30% of your customers pay within 30 days, 30% pay within the 60-day net period, 25% pay within a 90-day period and the last 15% pay in a 120-day period.

Calculate the average collection period. If the current industry standard collection period is 40 days, determine if an early payment credit is worth implementing. How great of a discount should you provide?

Reference no: EM13291908

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