Question

McEwan Industries sells on terms of 3/10, net 40, Total sales for the year are $838,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 84 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? Do not round intermediate calculations. Round your answer to the nearest cent.
c. What is the percentage cost of trade credit to customers who take the discount? If your answer is zero, enter zero. Round your answer to two decimal places.
d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 84 days? If your answer is zero, enter zero. Do not round intermediate calculations. Round your answers to two decimal places.
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 40th day?

Answer 1

a. Days Sales Outstanding

Time taken on average for customers to pay.

= (40% * 10 days) + (60% * 84 days)

= 54.4 days

b. Average Receivables =
`Average Sales * (Days Sales Outstanding)/(365)`

=838,000 *
`(54.4)/(365)`

= $124,896.44

c. 0% because if they take the discount they do not incur the cost.

d. Nominal Cost =
`(discount)/(1 - discount) * (365)/(Pay Period - Period discount allowed)`

=
`(0.03)/(1 - 0.03) * (365)/(85 - 10)`

= 15.25%

Effective Cost =
`(1 + (discount)/(1 - discount) ^ (365)/(Pay Period - Period discount allowed)) - 1`

=
`(1 + (0.03)/(1 - 0.03) ^ (365)/(84 - 10)) - 1`

= 16.21%

e. Days Sales Outstanding = (40% * 10 days) + (60% * 40 days)

= 28 days

Average Receivables =
`838,000 * (28)/(365)`

= $64,284.93