Question

McEwan Industries sells on terms of 3/10, net 20. Total sales for the year are $1,409,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 66 days after their purchases. Assume 365 days in year for your calculations.

A. What is the days sales outstanding? Round your answer to two decimal places.
_______days

B. What is the average amount of receivables? Round your answer to the nearest cent. Do not round intermediate calculations.
$________

C. What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.
________%

D. What is the percentage cost of trade credit to customers who do not take the discount and pay in 66 days? Round your answers to two decimal places. Do not round intermediate calculations.

Nominal cost:	________%
Effective cost:	________%

E. What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 20thday? Round your answers to two decimal places. Do not round intermediate calculations.
Days sales outstanding (DSO) = ________ days

Average receivables = $________

Answer 1

A.	Computation of days sales outstanding:
	40 % of the customes pay after 10 days	=	10 X 40%	=	4
	60% of the customes pay after 66 days	=	66 X 60%	=	39.6
	Day's sales outstanding			=	43.6	days
B.	Computation of Average amount of receivables:
	Receivables per day	=	$1,409,000 / 365 days	=	$     11,257.53
	Average amount of receivables	=	43.6 days X $11,257.53	=	$       4,90,828
C.	Computation of cost of trade to customers who take the discount:
	Customers pay in 10 days	=	No cost of trade	=	0
D.	Computation of cost of trade to customers who do not take the discount and pay in 66 day's:
	Nominal cost	=	Discount / (1 - Discount) X 365 / (Days taken - Discount period)
		=	3/97 X 365/(66 - 10)
		=	20.16%
	Effective cost	=	(1+ periodic rate)^n - 1
		=	(1.0309)^6.52 - 1
		=	21.95%
	Periodic rate	=	Discount / (1 - Discount)
		=	0.03 / 0.97
		=	0.0309
	Period (n)	=	365 / (Days taken - Discount period)
		=	365/(66 - 10)
		=	6.52
E.	Computation of days sales outstanding:
	40 % of the customes pay after 10 days	=	10 X 40%	=	4
	60% of the customes pay after 20 days	=	20 X 60%	=	12
	Day's sales outstanding			=	16	days
	Computation of Average amount of receivables:
	Receivables per day	=	$1,409,000 / 365 days	=	$     11,257.53
	Average amount of receivables	=	16 days X $11,257.53	=	$       1,80,121	days