Q3) Iron Man Products has projected the following sales for the coming year:

Q1 Sales:  $680

Q2 $730

Q3 $780

Q4 $860

Sales in the year following this one are projected to be 15 percent greater in each quarter.

a. Calculate payments to suppliers assuming that Iron Man places orders during each quarter equal to 30 percent of projected sales for the next quarter. Assume that Iron Man pays immediately. What is the payables period in this case?

b. Rework (a) assuming a 90-day payables period.

Answers:

Immediately

• Q1 = 30% x 730= 219
• Q2 = 30% x 780= 234
• Q3 = 30% x 860 = 258
• Q4 = 30% x 782 = 234.6

Assuming a 90-day payables period.

• Q1 = 30% x 680= 204
• Q2 = 30% x 730= 219
• Q3 = 30% x 780 = 234
• Q4 = 30% x 860 = 258

Step-by-step explanation

Average Payment Period:

• Average payment period is a ratio that measures the number of days it takes a Company to pay its suppliers for purchases made on credit. It is calculated by dividing the accounts payable by the average credit purchases.

Sale

• A sale is referred to a contract between parties for the trading of goods or services in exchange of required considerations. The participants to the contract should mutually understand the terms of the sale.

Step 1

Calculation for Q1 next year

[(15% + 100%) x Q1]

(115% x 680) = 782

Payment of account

Immediately

Q1 = 30% x 730= 219

Q2 = 30% x 780= 234

Q3 = 30% x 860 = 258

Q4 = 30% x 782 = 234.6

Part b)

Assuming a 90-day payables period.

Payment of account

Q1 = 30% x 680= 204

Q2 = 30% x 730= 219

Q3 = 30% x 780 = 234

Q4 = 30% x 860 = 258