Question

McEwan Industries sells on terms of 3/10, net 40. Total sales for the year are $1,048,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 82 days after their purchases. Assume 365 days in year for your calculations.

a)What is the days sales outstanding?

b)What is the average amount of receivables?

c)What is the percentage cost of trade credit to customers who take the discount?

d)What is the percentage cost of trade credit to customers who do not take the discount and pay in 82 days?(Both nominal and effective cost)

e)What would happen to McEwan’s average accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 40th day?

Answer 1

a. Days sales outstanding = 40% * 10 days + 60% * 82 days = 53.2 days

b. Average amount of receivables = 1,048,500 / 365 * 53.2 = 152,822.47

c. Percentage cost of trade credit to customers who take the discount = 0.00%

d.

Nominal cost = 3% / 97% * 365/ (82-10) * 100 = 15.67%

Effective cost = [ ( 1+3%/ 97%) ^365/72 ] -1 = 16.69%

e.

Days sales outstanding = 40% * 10 days + 60% * 40 days = 28 days

Average amount of receivables = 1,048,500 / 365 * 28 = 68942.47