Final answer:
The current annual carrying cost of capital for Mountain Home Clinic is $138,082.19. Reducing the average collection period to 45 days would decrease the carrying cost to $88,767.12. However, the annual cost of the proposed system upgrade is $55,000, which exceeds the savings from the reduced carrying cost, therefore it would not be advisable to implement the change.
Step-by-step explanation:
To answer the questions related to Mountain Home Clinic, various calculations need to be performed.
a) Annual Carrying Cost of Capital
The annual carrying cost of capital can be calculated using the formula: Carrying Cost of Accounts Receivable = Average Accounts Receivable / Annual Revenue * Carrying Cost Rate.
The Average Accounts Receivable is found by: Annual Revenue / 365 days * Average Collection Period. For Mountain Home Clinic, which business and produces an annual revenue of $8,000,000:
- Average Accounts Receivable = $8,000,000 / 365 * 70 = $1,534,246.58
- Annual Carrying Cost of Capital = $1,534,246.58 * 9% = $138,082.19
b) Carrying Cost after Reducing Collection Period
After reducing the average collection period to 45 days, we calculate the new carrying cost:
- New Average Accounts Receivable = $8,000,000 / 365 * 45 = $986,301.37
- New Annual Carrying Cost of Capital = $986,301.37 * 9% = $88,767.12
c) Decision on Implementing the Change
The annual cost of the new system is $55,000. Comparing this with the savings from reducing the carrying cost:
- Annual Savings = Old Carrying Cost - New Carrying Cost = $138,082.19 - $88,767.12 = $49,315.07
- Since the savings of $49,315.07 is less than the annual cost of the system upgrade ($55,000), it would not be financially prudent to implement the change.