Question

Milberg Manufacturing sells on terms of 2/10, net 30. Total sales for the year are    $3,500,000. Twenty five percent of customers pay on the 10th day and take discounts; the         other 75% pay, on average, 45 days after their purchases.

a.         What is the days sales outstanding?

b.         What is the average amount of receivables?

c.         What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 35th day?

Answer 1

Answer a.

25% of customers pay on the 10th day and 75% of customers pay on the 45th days

Days Sales Outstanding = 25% * 10 + 75% * 45
Days Sales Outstanding = 36.25 days

Answer b.

Days Sales Outstanding = 365 * Accounts Receivable / Total Assets
36.25 = 365 * Accounts Receivable / $3,500,000
Accounts Receivable = $347,602.74

Answer c.

25% of customers pay on the 10th day and 75% of customers pay on the 35th days

Days Sales Outstanding = 25% * 10 + 75% * 35
Days Sales Outstanding = 28.75 days

Days Sales Outstanding = 365 * Accounts Receivable / Total Assets
28.75 = 365 * Accounts Receivable / $3,500,000
Accounts Receivable = $275,684.93

So, average accounts receivables will decrease by $71,917.81 ($347,602.74 - $275,684.93)