The following scenario is the basis for the next four questions. A small, family-owned bakery has received a contract to supply bread to several play centers operated in nearby malls by a multi-national entertainment company. The total dollar volume of the business is $200,00 per year and the payment terms are Net 60 days. The bakery owners are understandably excited about the new business opportunity. But they are already borrowing money at 6.5% to finance investments needed to grow the business. The new contract will tie up more money in accounts receivable for the new contract, which will require them to increase the size of their loan.
1. How much money will be tied up on average in accounts receivable for the new contract?
2. What is the annual interest charge to carry the above balance as part of the bakery’s small business loan?