If Best changes their credit terms, they will have any extra 6 days of sales outstanding throughout the year (34 ? 28). Since credit sales are budgeted at $27,000,000 and the company uses a 360-day year, this equals $75,000 in credit sales per day and $450,000 in credit sales for 6 days ($27,000,000 ÷ 360 × 6). Because they will be holding this as additional receivables, they will not be able to invest this money elsewhere, thereby losing 8%, or $36,000 in interest during the year because of the higher receivables balance and more money "invested" in receivables. Therefore, Best must be able to save at least $36,000 in collection costs in order to make this change beneficial to the company.
This is interest for one month on $27,000,000 at 8% annual interest. The outstanding balance of receivables will increase because of the lengthening of the average collection period and there will be an opportunity cost equal to the interest lost on the amount of the increase. However, the average increase in receivables over the course of the year will not be $27,000,000. That figure is the total budgeted credit sales. The opportunity cost of interest on the increase in receivables will be equal to only the amount of increase in the outstanding receivables balance caused by the increased collection period multiplied by 8%, and it will be for a full year's time, not one month's time.
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This is interest for two months on $27,000,000 at 8% annual interest. The outstanding balance of receivables will increase because of the lengthening of the average collection period and there will be an opportunity cost equal to the interest lost on the amount of the increase. However, the average increase in receivables over the course of the year will not be $27,000,000. That figure is the total budgeted credit sales. The opportunity cost of interest on the increase in receivables will be equal to only the amount of increase in the outstanding receivables balance caused by the increased collection period multiplied by 8%, and it will be for a full year's time, not one month's time.
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