Question

Snider Industries sells on term of 2/10, net 45. Total sales for the year are $1,500,000. Thirty percent of customers pay on the 10th day and take discounts: the other 70% pay, on average, 50 days after their purchases.

a. What is the days sales outstanding?
b. What is the average amount of receivables?

c. What would happen to average receivables if Snider toughened its collection policy with the result that all non-discount customers paid on the 45th day.

Remember to include a brief discussion of each problem.

Answer 1

Answer: (a) It takes Snider 35 days

(b) The average amount of receivables for Snider Industries is $1,050,000.

(c) If Snider toughened its collection policy, the average amount of receivables would decrease by $31,920 to $1,018,080.

Step-by-step explanation:

a. The days sales outstanding (DSO) can be calculated as follows:

DSO = (0.3 x 10) + (0.7 x 50) = 35 days

This means that on average, it takes Snider Industries 35 days to collect payment from its customers.

b. The average amount of receivables can be calculated as follows:

Average receivables = (0.3 x 0.98 x $1,500,000 x 0.02) + (0.7 x $1,500,000 x 0.98)

Note that we multiply the total sales by 0.98, which represents the portion of sales that are not taken as discounts. The first term in the equation represents the portion of sales that are discounted and paid on the 10th day, while the second term represents the portion of sales that are not discounted and paid on average 50 days after the purchase.

Plugging in the numbers, we get:

Average receivables = (0.3 x 0.98 x $1,500,000 x 0.02) + (0.7 x $1,500,000 x 0.98)

= $20,580 + $1,029,420

= $1,050,000

Therefore, the average amount of receivables for Snider Industries is $1,050,000.

c. If Snider toughened its collection policy so that all non-discount customers paid on the 45th day, the average amount of receivables would decrease. This is because the 70% of customers who currently pay on average 50 days after their purchases would start paying on the 45th day instead.

The new average receivables can be calculated as follows:

New average receivables = (0.3 x 0.98 x $1,500,000 x 0.02) + (0.7 x $1,500,000 x 0.95)

Note that we use 0.95 instead of 0.98 for the second term because all customers would now be paying on the 45th day, so there would be no discounts.

Plugging in the numbers, we get:

New average receivables = (0.3 x 0.98 x $1,500,000 x 0.02) + (0.7 x $1,500,000 x 0.95)

= $20,580 + $997,500

= $1,018,080

Therefore, if Snider toughened its collection policy, the average amount of receivables would decrease by $31,920 to $1,018,080.