Question

McEwan Industries sells on terms of 3/10, net 20. Total sales for the year are $1,001,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 52 days after their purchases. Assume 365 days in year for your calculations.

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

days

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

$  

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

%

What is the percentage cost of trade credit to customers who do not take the discount and pay in 52 days? Round your answers to two decimal places. Do not round intermediate calculations.

Nominal cost:  %

Effective cost:  %

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 20th day? Round your answers to two decimal places. Do not round intermediate calculations.

DSO = days

Average receivables = $  

Answer 1

the days sales outstanding

40% of the customers pay after 10 days and 60% of them pay after 52 days :

0.4(10 ) + 0.6(52) = 35.2 days

the average amount of receivables is:

receivables in a day = $1001500/365 = 2744

therefore, the receivables after 35.2 days = 96588 days

there is no cost to the customers making the payment within the first 10 days, infact they get a discount of 3% of the total value of the purchase made.

percentage cost of credit of customers who pay in 52 days is :

nominal cost= discount/ 1- discount * 365/days taken - discount period

remember the days taken by the people who do not get any discount is 52 days.

the days taken by people who have taken discount is 10 days

the percentage of discount offered to them is 3%

so nominal cost = 3/97 * 365/52 - 10 = 26.87%

effective cost =

periodic rate = 0.03/0.97 = 3.09%

periods /year = 365/ 42= 8.69

the effective annual cost = (1 + periodic rate )^n - 1 = 30.27%  

(1.039)^8.69 - 1 * 100

now that teh customers paid on the 20th day,

the day's sales outstsanding is :

0.4(10) + 0.6(20) = 16 days.

the receivables per day is 2744

so the average receivables a will be : $43,904.

sales may decline as a result of tighter credit policy which may decrease the receivables ,also the customers making payments on th 20th day may ask for discounts which would further reduce the receivables.