Question

Snider Industries sells on terms of 2/10, net 35. Total sales for the year are $1,900,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 40 days after their purchases. Assume a 365-day year.

1. What is the days sales outstanding? Do not round intermediate calculations. Round your answer to the nearest whole number.

   ? days

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

   $ ?

3. What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 35th day? Do not round intermediate calculations. Round your answer to the nearest dollar.

   $ ?

Answer 1

Answer a.

30% of customers pay on 10^th day and 70% of customers pay on 40 days after their purchases.

Days sales outstanding = 30% * 10 + 70% * 40
Days sales outstanding = 31 days

Answer b.

Days sales outstanding = 365 * Average Accounts Receivable / Annual Sales
31 = 365 * Average Accounts Receivable / $1,900,000
Average Accounts Receivable = $161,370

Answer c.

30% of customers pay on 10^th day and 70% of customers pay on 35 days after their purchases.

Days sales outstanding = 30% * 10 + 70% * 35
Days sales outstanding = 27.50 days

Days sales outstanding = 365 * Average Accounts Receivable / Annual Sales
27.50 = 365 * Average Accounts Receivable / $1,900,000
Average Accounts Receivable = $143,151

If Snider toughened its collection policy then level of average accounts receivable will decrease by $18,219 ($161,370 - $143,151).