Question

1. Tech Industries sells on terms 2/15, net 45. Total sales for the year are $1,200,000. Forty percent of customers pay on the 15^th day and takes discounts, the other 60% pay on average, 50 days after their purchases. Support your below answers showing the calculations.

1. What is the days sales outstanding?
2. What is the average amount of receivables?
3. What would happen to average receivables if Tech industries toughened its collection policy with the result that all non-discount customers paid on the 45^th day?

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]

= [15 Days x 40%] + [50 Days x 60%]

= 6.00 Days + 30.00 Days

= 36.00 Days

(b)- Average amount of receivables

Sales per day = $3,287.6712 per day [$1,200,000 / 365 Days]

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

= $3,287.6712 per day x 36.00 Days

= $118,356

(c)-Change in average receivables if the Tech Industries toughened its collection policy with the result that all non-discount customers paid on the 45^th day

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]

= [15 Days x 40%] + [45 Days x 60%]

= 6.00 Days + 27.00 Days

= 33.00 Days

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

= $3,287.6712 per day x 37.00 Days

= $108,493

“If Tech Industries toughened its collection policy with the result that all non-discount customers paid on the 45^th day, then the average receivables would reduce to $108,493 from $118,356”