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Grunewald Industries sells on terms of 3/10, net 30. Gross sales last year were $4,672,000 and accounts receivable averaged $320,000. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of trade credit to Grunewald's nondiscount customers? (Hint: Calculate daily sales based on a 365-day year, calculate the average receivables for discount customers, and then find the DSO for the nondiscount customers.) Do not round intermediate calculations. Round your answers to two decimal places.

Nominal cost of trade credit:   %

Effective cost of trade credit:   %

Answer 1

Ans:

3/10, net 30 means a discount of 3% will be given if paid within 10 days, otherwise full payment has to be made within 30 days.

sales per day = total sales/365 days = 4,672,000/365 = $12800

half of the customers were non discount i.e 50% of 4,672,000 = $2336,000. This was the value of goods bought by them.

The loss of gain in terms of the 3% discount is the cost of trade to the non discount customers.

average receivables in case of non discount customers = half of the total average receivables (as the non discount customers is the half of total customers) = 1/2*320,000 = $160,000

DSO for non discount customers = (accounts receivables/sales)*365

= (160,000/2336000)*365 = 365/0.1058 = 25 days

It means that the non discount customers pay on an average in 25 days.

cost of trade credit (nominal) = (% of Discount)/(100-% of Discount)×365/(Payment Date as per the terms-Discount Period)

= (3%)/(100%-3%)*365/(30-10)

=0.030928*18.25 = 0.5644 or 56.44%

cost of trade credit (effective) = (% of Discount)/(100-% of Discount)×365/(actual Payment Date -Discount Period)

actual payment date is the DSO.

= (3%)/(100%-3%)*365/(25-10)

= 0.030928*24.333= 0.7528 or 75.28%

Here is the nominal rate is greater than effective rate as in reality, the customers pay later than 30 days, thus reducing their effective cost of trade.