Question

The Hewitt Company has calculated that their average collection period (ACP) is 25 days. They are hoping that the new cash discounts they have implemented will reduce the ACP. After one month, they have the following data: 60% pay in 15 days and 40% pay in 30 days. How much is the change in the ACP?

a. 4 days reduced
b. 4 days increased
c. 17 days increased
d. 21 days reduced

Answer 1

Answer:

a. 4 days reduced

Explanation:

Calculation for How much is the change in the ACP

First step is to calculate New Collection Period

New Collection Period =( 60% * 15 Days) + (40% * 30 Days )

New Collection Period=9 Days+12 Days

New Collection Period= 21 Days

Last step is to calculate Change in ACP using this formula

Change in ACP =Current Average Collection Period -New Collection Period

Let plug in the formula

Change in ACP = 25 Days - 21 Days

Change in ACP= 4 Days (Reduced)

Therefore the change in the ACP will reduced by 4 days