97.2k views
0 votes
Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were $4,380,000 and accounts receivable averaged $493,500. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of trade credit to Grunewald's nondiscount customers

User Bruvio
by
6.9k points

2 Answers

3 votes

Answer:

Nominal cost = 17.7 %.

Effective cost = 19.2 %

Step-by-step explanation:

Calculate daily sales based on a 365-day year,

calculate the average receivables for discount customers,

find the DSO for the nondiscount customers

Sales per day = $4,380,000 / 365 days = $12,000

Discounted sales = 0.50 ($12,000) = $6,000

Accounts receivable attributable to discount customers = 10 * $6,000 = $60,000

Accounts receivable attributable to non-discount customers = $493,500 - $60,000 = $433,500

Alternatively

$493,500 / $12,000 = 41.13 days i.e. 41 days

41 days = 0.50 (10) + .50 * DSO nondiscount

Non discount = 36/.50 = 72 days

Non discount are require to pay in 40 days but they are paying in 72 days

Effective cost = (1 + 2/98 ) ^ (365 / 42) - 1

1.192 - 1 = 0.192 = 19.2 %

Nominal cost = 2/98*365/42 = 0.177 = 17.7 %.

User Ben Davis
by
7.9k points
4 votes

Answer:

Nominal 24.83%

Effective 27.86%

Step-by-step explanation:

Terms 2/10, n/40 means there is a discount of 2% is available on payment of due amount within discount period of 10 days after sale with net credit period of 40 days.

Gross Sales = $4,380,000

Received within 10 days = $2,190,000

As $2,190,000 of Gross sales payments are made within discount period, discount will be availed on this value.

Discount = $2,190,000 x 2% = $43,800

Nominal Cost of trade = 2%

Effective cost of Trade

Nominal Cost of trade = 2% / (1 - 2%) x (365 / (40 -10 )

Nominal Cost of trade = 24.83%

Effective cost of Trade = ( 2%/(1-2%) )^(365/(40-10)) - 1

Effective cost of Trade = 27.86%

User P Varga
by
7.0k points