Question

McEwan Industries sells on terms of 3/10, net 25. Total sales for the year are $511,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 76 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.

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

   days

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

   $  

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

   %

4. What is the percentage cost of trade credit to customers who do not take the discount and pay in 76 days? Round your answers to two decimal places. Do not round intermediate calculations.

   Nominal cost:  %

   Effective cost:  %

5. 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 25th day? Round your answers to two decimal places. Do not round intermediate calculations.

   DSO =  days

   Average receivables = $  

Answer 1

a) calculation of the days sales outstanding(DSO):-

Days sales outstanding means average collection period of the receivables.

Days sales outstanding = 40%*10 days +60%*76days

Days sales outstanding = 49.6 days

B) calculation of the average amount of the receivables-:

Average amount of receivables =( total credit sales/365 days) * DSO

= (511,000/365 days)*49.6 days

Average amount of receivables = $69,440

C)the customer who pay by 10th for the discount get free of the credit.

D)trade credit = (discount/ amount after discount)* 365days/days taken-disc period.

Nominal cost = (3/97)*(365/76-10)

Nominal cost = 17.104%

Effective cost of TC=[ (1+discount/1-discount)^{365/days taken- disc days}] -1

= (1+3/97)^365/76-10-1

= 1.18346748 -1

Effective cost = 18.35%