McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are
ID: 2713782 • Letter: M
Question
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $1,393,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 64 days after their purchases. Assume 365 days in year for your calculations.
a) What is the days' sales outstanding? Round your answer to two decimal places.
days
b) What is the average amount of receivables? Round your answer to the nearest cent.
c) What is the percentage cost of trade credit to customers who take the discount? Round your answer to two decimal places.
d) What is the percentage cost of trade credit to customers who do not take the discount and pay on Day 64? Round your answers to two decimal places.
Nominal cost:
Effective cost:
e) What would happen to McDowell’s accounts receivables if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day? Round your answers to two decimal places.
DSO =
Average receivables =
a) What is the days' sales outstanding? Round your answer to two decimal places.
days
b) What is the average amount of receivables? Round your answer to the nearest cent.
c) What is the percentage cost of trade credit to customers who take the discount? Round your answer to two decimal places.
d) What is the percentage cost of trade credit to customers who do not take the discount and pay on Day 64? Round your answers to two decimal places.
Nominal cost:
Effective cost:
e) What would happen to McDowell’s accounts receivables if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day? Round your answers to two decimal places.
DSO =
Average receivables =
Explanation / Answer
(a) Days sales outstanding = 40% * 10 + 60% * 64
= 42.40 days
(b) Average amount of receivables = 42.40 / 365 * $1,393,500
= $161,875.06
(c) Cost of trade for customers who take the discount
Nominal cost = 0%
Effective cost = 0%
(d) Cost of trade for customers who don not take the discount
Nominal cost = 2%/ (1 - 2%) * 365 / (64 - 10)
= 13.79%
Effective cost = [1 + 2%/(1-2%)]365/(64-10) - 1
= 14.63%
(e) New days sales outstanding = 40% * 10 + 60% * 30
= 22.00 days
New average amount of receivables = 22.00 / 365 * $1,393,500
= $83,991.77