McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are
ID: 2661153 • Letter: M
Question
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500. Forty percent of customers pay on the 10th day and take discounts; 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 would happen to average receivables if McDowell toughened its collection policy with the result that all non-discount customers paid on the 30th day?
The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 90th day, and thereby obtain the needed $500,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit?
The Zocco Corporation has an inventory conversion period of 60 days, an average collection period of 38 days, and a payables deferral period of 30 days. Assume that cost of goods sold is 75% of sales.
a. What is the length of the firm
Explanation / Answer
1)
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.
2) If he paid in 10th day, he need to paid 485,000
If he paid in 90thday, he need to paid 500,000
This can be look as interest for 80 days
Effective rate = 15,000/485,000 * 360/80 * 100%
= 13.92%
3) a. =
= 60 + 38