Problem 15-5 Receivables investment McDowell Industries sells on terms of 3/10,
ID: 2636555 • Letter: P
Question
Problem 15-5
Receivables investment
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $1,543,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 76 days after their purchases. Assume 365 days in year for your calculations.
What is the days' sales outstanding? Round your answer to two decimal places.
days
What is the average amount of receivables? Round your answer to the nearest cent.
$
What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.
%
What is the percentage cost of trade credit to customers who do not take the discount and pay on Day 76? Round your answers to two decimal places.
Nominal cost: %
Effective cost: %
What would happen to McDowell
Explanation / Answer
a. 0.4(10) + 0.6(40) = 28 days.
b. $912,500/365 = $2,500 sales per day.
$2,500(28) = $70,000 = Average receivables.
c. 0.4(10) + 0.6(30) = 22 days. $912,500/365 = $2,500 sales per day.
$2,500(22) = $55,000 = Average receivables.
Sales may also decline as a result of the tighter credit. This would further reduce receivables. Also, some customers may now take discounts further reducing receivables.