Cost of Trade Credit Grunewald Industries sells on terms of 3/10, net 50. Gross
ID: 2650819 • Letter: C
Question
Cost of Trade Credit
Grunewald Industries sells on terms of 3/10, net 50. Gross sales last year were $4,972,000, and accounts receivable averaged $488,000. 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 sales/day based on a 365-day year; then get average receivables of discount customers; then find the DSO for the nondiscount customers.) Do not round intermediate calculations. Round your answers to two decimal places.
Nominal cost % Effective cost %Explanation / Answer
Nominal Cost of Trade Credit = Discount percentage / (100 - Discount percentage) = 3 / (100 - 3) = 3.09%
Effective Cost of Trade Credit = [Discount percentage / (100 - Discount percentage)] x [365 / (credit period