Question

McEwan Industries sells on terms of 3/10, net 40. Total sales for the year are $575,000; 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. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

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 52 days? Round your answers to two decimal places. Do not round intermediate calculations.

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 40th day? Round your answers to two decimal places. Do not round intermediate calculations.

Answer 1

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

b). Average Receivables = [Sales / 365] x DSO

= [$575,000/365] x 35.2 = $55,452.05

c). Cost of Trade Credit = [365/(f−p)] x [d/(1−d)]

This is where:

• d is the discount
• f is the final due date
• p is the discount period

Cost of Trade Credit = [365/(40 - 10)] x [0.03/(1−.03)] = 12.17 x 0.0309 = 37.63%

d). Nominal Cost of Trade Credit = [365/(52−10)] x [0.03/(1−.03)] = 8.69 x 0.0309 = 26.88%

Effective Cost = [1.0869]^3.09 - 1 = 1.2940 - 1 = 0.2940, or 29.40%

e). If all non-discount customers will pay on the 40th day, the average accounts receivable will be:

DSO = ACP = 0.4(10) + 0.6(40) = 28 days

Average Receivables = [Sales / 365] x DSO

= [$575,000/365] x 28 = $44,109.59