McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,976,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 86 days after their purchases. Assume 365 days in year for your calculations.
A. What is the average amount of receivables? Round your answer
to the nearest cent. Do not round intermediate calculations.
$
B. What is the percentage cost of trade credit to customers who
take the discount? Round your answers to two decimal places.
%
c. What is the percentage cost of trade credit to customers who do
not take the discount and pay in 86 days? Round your answers to two
decimal places. Do not round intermediate calculations.
Nominal cost: | % |
Effective cost: | % |
D. What would happen to McEwan’s accounts receivable if it
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. Do not round intermediate calculations.
Days sales outstanding (DSO) = days
Average receivables = $
A Average Receivables= Sales* Days Sales outstanding/365
Where Days sales outstanding= 40%*10 + 60% *86
Days sales outstanding= 4+ 51.6= 55.6 days
Average receivables= $1976500 * 55.6/365
Average receivables= $301077.81
B Percent cost of trade credit to customers who take the discount= Discount% * 365/[1-Discount% * credit period]
Percent cost of trade credit to customers who take the discount=3% *365/ [1-3% *20]
Percent cost of trade credit to customers who take the discount= 10.95/.97*20
Percent cost of trade credit to customers who take the discount= .5644 or 56.44%
C Net credit period= 86-10= 76 days
Nominal cost= 3/97*365/76= 14.85%
Effective cost= [(1+3/97)^365/76]-1= [(1.0309)^4.802]-1
Effective cost=1.1573-1= 15.73%
D Days sales outstanding= 40%*10 + 60% *30
Days sales outstanding= 4+ 18= 22days
Average Receivables= Sales* Days Sales outstanding/365
Average receivables= $1976500 * 22/365
Average receivables= $119131.50
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