Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were

Question

Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were $4,562,500 and accounts receivable averaged $437,500. 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? (Hint: Calculate sales/day based on a 365-day year, then calculate average receivables of discount customers, and then find the DSO for the nondiscount customers.)

Please show the work for the nominal cost of trade credit, thanx

Explanation / Answer

Acct Rx = 437,500

As 50% Avail Trade Disc by paying within 10 days, = 437500/2 = 218750

So Non-Disc cust is balance 50% = $218,750

DSO = 40-10 = 30days

SO Avge Rxable for (40-10) = 30 days = 218750*(30/365) = 17,980

Nominal Cost of Trad credit =

= (DIsc %/(100 - Disc%)) * 365/(Days credit outstandng - Disc Period)

= (2%/(100%-2%))*365/(40-10)

= 24.83%

SO Nominal cost of Disc = 24.83%*17980 =$4464

Effective disc = (1+i/n)^n-1

= (1+24.83%/30)^(365/30) -1 = 10.55%

So Effctive cost of Disc = 10.55%*218750 = $23,078

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