In: Finance
Problem 16-06 Snider Industries sells on terms of 3/10, net 35. Total sales for the year are $510,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 40 days after their purchases. Assume 365 days in year for your calculations.
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(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]
= [10 Days x 30%] + [40 Days x 70%]
= 3.0 Days + 28.0 Days
= 31.0 Days
(b)- Average amount of receivables
Sales per day = $1,397.26 per day [$510,000 / 365 Days]
Average amount of receivables = Sales per day x Days sales outstanding (DSO)
= $1,397.26 per day x 31.0 Days
= $43,315 (Rounded to the nearest Dollar)
(c)-Change in average receivables if the snider toughened its collection policy with the result that all non-discount customers paid on the 35th 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]
= [10 Days x 30%] + [35 Days x 70%]
= 3.0 Days + 24.5 Days
= 27.5 Days
Sales per day = $1,397.26 per day [$510,000 / 365 Days]
Average amount of receivables = Sales per day x Days sales outstanding (DSO)
= $1,397.26 per day x 27.5 Days
= $38,425 (Rounded to the nearest Dollar)
“If Snider toughened its collection policy with the result that all non-discount customers paid on the 35th day, then the average receivables would reduce to $38,425 from $43,315”