McDowell Industries sells on terms 3/10, net 30. Total Sales for the year are $
ID: 2675452 • Letter: M
Question
McDowell Industries sells on terms 3/10, net 30. Total Sales for the year are $ 912,500.00: 40% of the customers pay on the 10th day and take discounts, while 40 % pay on the 30th day and the other 20% pay, on average, 40 days after their purchases. The bad debts percentage is estimated to be 5%. Use a 365 day year. Calculate both the APR and EAR of d and e.a. What is the days sales outstanding?
b. What is the average amount of receivables?
c. What is the Dollar amount of the discounts?
d. What is the cost of trade credit to customers who do not take the discount and pay on day 30?
e. What is the cost of trade credit to customers who stretch the discount and pay on day 40?
f. What is the dollar cost of bad debts?
Explanation / Answer
a. days sales outstanding = 0.4(10) + 0.4(30) + 0.2(40)= 24 days. b. average amount of receivables = Sales per day*Days sales outstandin $912,500/365 = $2,500 sales per day. $2,500(24 days) = $60,000 = Average receivables. c. DOllar disc will be availed by only 40% cust who pays within 10 days. SO Sales to thse cust = 40%*$912500 = $365,000 SO Disc enjoyed is 3%*$365,000 = $10,950 d. What is the cost of trade credit to customers who do not take the discount and pay on day 30? 40% cust who pays in 30 days but after 10 days. SO Cost of Trade credit = APR = [%disc/(1-%Disc)]*(365/(Days Taken - Disc period)) = (3%/(1-3%))*(365/(30-10)) = 56.44% Periodic rate = 0.03 / 0.97 = 3.09% Periods/year = 365 / (30-10) = 18.25=n Effective cost of trade credit EAR = (1 + periodic rate)^n – 1 = (1+3.09%)^18.25 – 1 =74.26% e. What is the cost of trade credit to customers who stretch the discount and pay on day 40? 20% cust who pays in 40 days but after 30 days. SO Cost of Trade credit = APR = [%disc/(1-%Disc)]*(365/(Days Taken - Disc period)) = (3%/(1-3%))*(365/(40-10)) = 37.63% Periodic rate = 0.03 / 0.97 = 3.09% Periods/year = 365 / (40-10) = 12.1667=n Effective cost of trade credit EAR = (1 + periodic rate)^n – 1 = (1+3.09%)^12.1667 – 1 = 44.81% f. What is the dollar cost of bad debts? Bad debt is 5% of Sales = 5%*$912,500 = $45,625