Patriots Industries sells on terms of 3/10, net 30. Total sales for the year are
ID: 2496353 • Letter: P
Question
Patriots Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500; 40% of customers pay on the 10th day and take discounts, while the other 60% pay (on average) 40 days after their purchases. a. What is the days’ sales outstanding? b. What is the average amount of receivables? c. What is the percentage cost of trade credit to customers who take the discount? d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 40 days? e. What would happen to Patriots’ accounts receivable if it toughened up on its collection policy with the result that all non-discount customers paid on the 30th day?
Explanation / Answer
What is the days’ sales outstanding 0.4(10) + 0.6(40) = 28 days. sales per day $912,500/365 = $2,500 Average receivables $2,500(28) = $70,000 Nominal cost of trade credit 3/97*365/(30-10) =56.44% Effective cost of trade credit =+(3/97)^(360/(30-10))-1 =-100% Nominal cost of trade credit When No discount =3/97 *(365/40-10 ) =-2.706% Nominal cost of trade credit When No discount =+(3/97)^(360/(40-10))-1 =-100% What would happen to Patriots’ accounts receivable if it toughened up on its collection policy with the result that all non-discount customers paid on the 30th day? Average receivables 0.4(10) + 0.6(30) = 22 days sales per day $912,500/365 = $2,500 sales per day Average receivables $2,500(22) = $55,000 = Average receivables.