McDowell Industries sells on terms of 3/10, net 35. Total sales for the year are
ID: 2749359 • Letter: M
Question
McDowell Industries sells on terms of 3/10, net 35. Total sales for the year are $1,509,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 74 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 74? Round your answers to two decimal places.
Nominal cost: %
Effective cost: %
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 35th day? Round your answers to two decimal places.
DSO = days
Average receivables = $
Explanation / Answer
1)days sales outstanding=(0.4*10)+(0.6*74)=48.4 days
2)Averag amount of receivables=(1509000/362)*48.4 days=$200,098
3)Customers who take discount: Free trade credit.it is 3%
4)Customers who do not take the discount and pay on Day 74:
Nominal cost: 3/97 * 365/(74-35) = 28.95%
Effective cost: (1 + 3/97)^(365/39) – 1 =33%
5)
0.4(10) + 0.6(35) = 25 days
$912,500/365 = $2,500 sales per day
$2,500(25) = $62,500 = Average receivables