Question

Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average collection period.
A. 88 days

B. 44 days

C. 74 days

D. 60 days

Answer 1

Answer:

Mace's average collection period is 88 days

Explanation:

Credit terms is "Net 60" which means the customer will naturally pay within 60 days. Further it is given that account average 28 days overdue. This means it takes 28 more days to collect the amount of receivables. Therefore the average collection period comes to

60 + 28 = 88 days.