Question

Need answer to Part B(a) A hardware vendor manufactures $300 million worth of PCs per year. On average, the company has $45 million in accounts receivable, how much time elapses between invoicing and payment in terms of days if each year is 360 days?(b) Moreover, assuming that there is an average annual opportunity percentage cost of 10% (i.e., if you are promised by one of your buyer to receive 1000$ in one year from now, you could have made the average 1100$ in a year (by investing somewhere else) if you had received that 1000 $ today. Hint: think of exactly annual holding cost rate of inventory), what would be on average the opportunity cost in year for this vendor for 1 $ worth of account receivable?Moreover, assuming that there is an average annual opportunity percentage cost of 10% (i.e., if you are promised by one of your buyer to receive 1000$ in one year from now, you could have made the average 1100$ in a year (by investing somewhere else) if you had received that 1000 $ today. Hint: think of exactly annual holding cost rate of inventory), what would be on average the opportunity cost in year for this vendor for 1 $ worth of account receivable?

Answer 1

Answer:

a) The time that elapses between invoicing and payment in terms of days:

= 55 days (54.7)

b) Annual Holding Cost of Inventory = $450,000.

Explanation:

a) Data and Calculations:

Average Accounts Receivable = $45 million

Worth of PCs manufactured = $300

Period of days in a year = 360 days

Accounts receivable turnover ratio = Net Sales/Average Receivable

= $300/$45 = 6.67

Accounts receivable days = 365/6.67 = 55 days

Annual holding cost of inventory:

= Average accounts receivable * Interest rate

= $45,000,000 * 10%

= $450,000