30 Jan a. What is Fargo’s average

PROBLEM Set 7

Chapter 15 — Revenue Cycle and Current Accounts Management

Assigned Problem 1

James Buchanan Orthotics and Prosthetics is planning to request a line of credit from its bank.

The company has produced sales estimates, and these appear in the worksheet below. Collection

estimates are as follows: 10 percent within the month of sale, 75 percent in the month following

the sale, and 15 percent in the second month following the sale. Labor and supplies estimates also

appear in the worksheet below. Payments for labor and supplies are typically made during the

month following the one in which these costs have been incurred. General and administrative

salaries will amount to approximately $27,000 a month; lease payments under long-term lease

contracts will be $9,000 a month; depreciation charges will be $36,000 a month; miscellaneous

expenses will be $2,700 a month; income tax payments of $63,000 will be due in both September

and December; and a progress payment of $180,000 on a new building must be paid in October.

Cash on hand on July 1 will amount to $132,000, and a minimum cash balance of $90,000 will be

maintained throughout the cash budget period. What loan will be the company require in

October?

PROB LEM SET 7

Chapter 15 — Revenue Cycle and Current Accounts Management

Assigned Problem 2

Suppose one of the suppliers to Seattle Health System offers terms of 3/20, net 60.

a. When does the system have to pay its bills from this supplier?

b. What is the approximate percentage cost of the costly trade credit offered by this supplier?

(Assume 360 days per year.)

PROBLEM SET 7

Chapter 15 — Revenue Cycle and Current Accounts Management

Assigned Problem 3

Fargo Memorial Hospital has annual net patient service revenues of $14.4 million. The hospital’s

patient accounts manager estimates that 10 percent of third party payers pay on Day 30, 60 percent

pay on Day 60, and 30 percent pay on Day 90. Assume 360 days per year throughout this problem.

a. What is Fargo’s average collection period?

b. What is the firm’s current receivables balance?

c. What would be the firm’s new receivables balance if a newly proposed electronic claims system

resulted in collecting from third-party payers in 45 and 75 days, instead of in 60 and 90 days?

d. Suppose the firm’s annual cost of carrying receivables was 10 percent. If the electronic claims

system costs $30,000 a year to lease and operate, should it be adopted? (Assume that the entire

receivables balance has to be financed.)