Any help, references such as web sites that will help to answer the
following question is welcomed.

A firm offerens terms of 2/15, net 30.  Currently 2/3 of all customers
take advantage of the trade discount, the remainder pay bills at the
due date.
a) What will be the firm's typical value for its accounts receivable
period?
b) What is the average investment in accounts receivable if annual
sales are $20 million.
c) What would likely happen to the firm's accounts receivable period
if it changed its terms to 3/15, net 30?

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Request for Question Clarification by omnivorous-ga on 21 Jun 2003 16:14 PDT

Boobee --

This question requires quite a few assumptions, though it's not too
tough.

The hard one is c: (though the short answer is that 'one would expect
the AR period to decline.')  Do you need an estimate of a decline?

The change in imputed interest rate between the two policies is from
62% up to 105%.  You'd expect AR to decline -- but it might not if you
were in inflationary Brazil of the early 1990s.  And there are at
least a dozen structural reasons why the collection period might rise,
despite the higher discount (government budget issues -- and
government sales are a major sector; quality problems causing
customers to delay payments; more international sales with longer
delivery times, etc.)

Best regards,

Omnivorous-GA

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Clarification of Question by boobee-ga on 21 Jun 2003 17:00 PDT

I also felt that something was missing.  What I need to know is how to
calculate the typical value for its accounts receivables period #a. 
Would it be calculated 2/3 x 15 = 10 and 1/3 x 30 = 10; avg days in
receivables is 20?
And then b#20 mil: accts rec = daily sales x avg collection period =
20mil/365 = 54,794 x 20 = NOT RIGHT UH?
For #c Your answer seems to me to be correct with the limited amount
of information given.

Thanks for your help

Boobee -

We this is a first: the customer answers the question!  Using "days
sales outstanding" you have answered a) and b) correctly.  This is
from a stock analysis web page:
TakeStockAmerica
"The Operating Cycle" (undated)
http://www.takestockamerica.com/Site/Main%20Level/TSA%20University/Radio%20Lessons/Deeper%20Reading/Operating/OPRTNG2.htm

a) With 66% paying at 15 days (that's fast, given the speed of the
mail and turnaround times) and 33% at 30 days, you've calculated it
correctly: .66 x 15 + .33 x 30 = 20 days.

b) daily sales are $20 million divided by 365 = $54,795.  So the
average investment in receivables is $1,095,8890.

c) receivables SHOULD shrink, given the dramatic increase in the trade
discount.  Only experience would tell (and see my caveats from above).
 Note that AT LEAST $13.2 million of the company's sales could be
expected to take the additional 1% discount - costing the company at
$132,000 in lost profits.  It still may be worth it if cash conditions
were tight but if the added discount resulted in NO CHANGE, it would
be a major profit hit.

Best regards,

Omnivorous-GA

You explain things so very well -- thanks again for all your help --
FIVE GOLD STARS*****