McEwan Industries sells on terms of 3/10, net 20. Total sales for the year are t
ID: 2794298 • Letter: M
Question
McEwan Industries sells on terms of 3/10, net 20. Total sales for the year are t1 231,000; 40% afthe ast om spayon the 10, day 7. days after their purchases. Assume 365 days in year for your calculations. s What is the days sales outstanding? Round your answer to two decimal bliaces and it diuruts-Mth the 60s par a. mom 9. 53.6days 10 b. What is the average amount of recelvables? Round vour answer to the newrest cene De net rund ihem s 182088 C. What is the percentage cost of trade credit to oustomers who take the discount? Round your answers to two decimal places 2.04 *% diecount and pay in 75 days Round your ansmers to b decima places De sot d. What is the percentage cost of trade credit to customers who do not take the Nominal cost: 56.39.0% Effective cost: 44.83 % de od e. What would happen to McEwan's accounts receivable if it toughened up on its callection policy with the resuat thst al ondicount asmers puid on the decimal places. Do not round intermediate caloulations Days sales outstanding (OSO) 16 days Average receivables-s53968 HideExplanation / Answer
Answer 1-a.
40% of customers pay on the 10th day and 60% of customers pay on the 76th day
Days Sales Outstanding = 40% * 10 + 60% * 76
Days Sales Outstanding = 49.60 days
Answer 1-b.
Days Sales Outstanding = 49.60
365 / Receivables Turnover = 49.60
Receivables Turnover = 365 / 49.60
Receivables Turnover = 7.36
Receivables Turnover = Sales / Average Receivables
7.36 = $1,231,000 / Average Receivables
Average Receivables = $167,255.43
Answer 1-c.
If customers take the discount, then there is no cost of credit.
So, Cost of Trade Credit is 0%
Answer 1-d.
Nominal Cost = [Discount rate / (1 - discount rate)] * [365 / (Credit period - discount period)]
Nominal Cost = [0.03 / (1 - 0.03)] * [365 / (76 - 10)]
Nominal Cost = 0.030928 * 5.5303
Nominal Cost = 0.1710 = 17.10%
Effective Cost = [1 + {Discount rate / (1 - discount rate)}]^ [365 / (Credit period - discount period)] - 1
Effective Cost = [1 + {0.03 / (1 - 0.03)}]^[365 / (76 - 10)] - 1
Effective Cost = (1 + 0.030928)^5.5303 - 1
Effective Cost = 0.1835
Effective Cost = 18.35%