Question

Ruth Home Health currently has $1,000,000 in accounts receivable. Its days in patient accounts receivable (DPAR) is 50 days (based on a 365-day year). The agency wants to reduce its DPAR to the industry average of 32 days by pressuring more of its customers to pay their bills on time. The CFO estimates that, if this policy is adopted, the agency's net patient service revenue will fall by 10 percent. Assuming that the agency adopts this change and succeeds in reducing its DPAR to 32 days and loses 10 percent of its net patient service revenue, what will be the level of accounts receivable following the change?

Answer 1

To find the new level of accounts receivable for Ruth Home Health after reducing its DPAR to 32 and losing 10% of patient service revenue, calculate the current daily revenue, apply the revenue reduction, and multiply the result by the new DPAR. This results in a new level of accounts receivable of $576,000.

Step-by-step explanation:

The student is asking how the level of accounts receivable will change if Ruth Home Health successfully reduces its days in patient accounts receivable (DPAR) to the industry average and also experiences a decrease in net patient service revenue by 10 percent. To calculate the new level of accounts receivable, we need to determine the current daily revenue and then find the impact of the revenue reduction and DPAR change.

First, we calculate current daily revenue (CDR) by dividing the current level of accounts receivable by the DPAR:

CDR = $1,000,000 / 50 = $20,000 (daily revenue).

After a 10 percent decrease in net patient service revenue, the new daily revenue (NDR) would be 90 percent of CDR:

NDR = 0.9 × $20,000 = $18,000.

The new level of accounts receivable (NAR) is based on the NDR multiplied by the new DPAR of 32 days:

NAR = NDR × 32 days = $18,000 × 32 = $576,000.

Thus, if Ruth Home Health implements this policy change and everything goes as expected, the level of accounts receivable following the change would be $576,000.