question archive McEwan Industries sells on terms of 3/10, net 20
McEwan Industries sells on terms of 3/10, net 20
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McEwan Industries sells on terms of 3/10, net 20. Total sales for the year are $1,853,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 72 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. Do not round intermediate calculations. $ c. What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places. % d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 72 days? Round your answers to two decimal places. Do not round intermediate calculations. Nominal cost: % Effective cost: % e. 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 20th day? Round your answers to two decimal places. Do not round intermediate calculations. Days sales outstanding (DSO) = days Average receivables = $
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| DSO is the weighted average of the payment period of the two classes of receivables; one those who take the cash discount and pay on the 10th day and the second who pay by the 72nd day. | |||
| The DSO = 10*40%+72*60% = | 47.20 | Days | |
| b] | Average amount of receivables = Sale*DSO/365 = 1853000*47.2/365 = | $ 239,620.82 | |
| c] | % cost of trade credit who take the discount [free credit period] = | 0.00% | |
| d] | % cost of trade credit to who take discount and pay within 72 days, | ||
| The payment terms are 3/10 net 20, which means that payment is to | |||
| be made by the 20th day if, discount is not availed of. | |||
| But, the customers who do not take discount are paying by the 72nd | |||
| day, which means the credit taken by them beyond the free credit | |||
| period of 10 days, is 62 days | |||
| The interest rate for 62 days = 3/97 = | 3.09% | ||
| APR = (3/97)*(365/62) = | 18.21% | ||
| EAR = (1+3/97)^(365/62)-1 = | 19.64% | ||
| e] | DSO = 10*40%+20*60% = | 16.00 | Days |
| Average receivables = 1853000*16/365 = | $ 81,227.40 |
