Question

Morrissey Industries sells on terms of 3/10, net 30. Total sales for the year are $900,000. Forty percent of the customers pay on Day 10 and take discounts; the other 60 percent pay, on average, 40 days after their purchases. What are (a) the days sales outstanding (DSO) and (b) the average amount of receivables? (c) What would happen to average receivables if Morrissey tightened its collection policy with the result that all non-discount customers paid on Day 30?

Answer 1

(a)- Days sales outstanding (DSO)

Days sales outstanding (DSO) = [Number of days in discount period x percent of the customers pay] + [Non-discount period x percent of the customers pay]

= [10 Days x 40%] + [40 Days x 60%]

= 4 Days + 24 Days

= 28 Days

(b)- Average amount of receivables

Sales per day = $2,465.75 per day [$900,000 / 365 Days]

Average amount of receivables = Sales per day x Days sales outstanding (DSO)

= $2,465.75 per day x 28 Days

= $69,041

(c)-Change in average receivables if Morrissey tightened its collection policy with the result that all non-discount customers paid on Day 30

Days sales outstanding (DSO) = [Number of days in discount period x percent of the customers pay] + [Non-discount period x percent of the customers pay]

= [10 Days x 40%] + [30 Days x 60%]

= 4 Days + 18 Days

= 22 Days

Sales per day = $2,465.75 per day [$900,000 / 365 Days]

Average amount of receivables = Sales per day x Days sales outstanding (DSO)

= $2,465.75 per day x 22 Days

= $54,246.50

“If Morrissey tightened its collection policy with the result that all non-discount customers paid on Day 30, then the average receivables would reduce to $54,246.50 from $69,041”