A company plans to tighten its credit policy. The new policy will
decrease the average number of days in collection from 75 to 50
days and reduce the ratio of credit sales to total revenue from 70
to 60%. The company estimates that projected sales would be
5% less if the proposed new credit policy were implemented.
The firm’s short-term interest cost is 10%.

Projected sales for the coming year are $50 million. Calculate
the dollar impact on accounts receivable of this proposed
change in credit policy. Assume a 360-day year.

(c) The requirement is to calculate impact of this
change in policy on accounts receivable. Under the existing policy,
sales are equal to $50,000,000, 70% of which are on credit.
Therefore, the average accounts receivable balance is equal to
$7,291,667 [($35,000,000 credit sales ÷ 360 days) × 75 days].
Under the new policy credit sales are estimated to be
$28,500,000 [($50,000,000 × 95%) × 60%]. Accordingly, the
average accounts receivable balance under the new policy is estimated
to be $3,958,333 [($28,500,000 credit sales ÷ 360) × 50
days]. Answer (c) is correct because the change in accounts
receivable balance is estimated to be a decrease of $3,333,334
($7,291,667 – $3,958,333).