Snider Industries sells on term of 2/10, net 45. Total sales for the year are $1

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.

Explanation / Answer

1 a. DSO = 30%*10 + 70%*50 = 38 days

b. DSO = Acct Rxable/(Sales/365)

So Acct rxable = DS0*Sales/365

= 38*1500000/365 = $156,164

c. New DSO = 30%*10 + 70%*45 = 34.5 days

DSO = Acct Rxable/(Sales/365)

So Acct rxable = DS0*Sales/365

= 34.5*1500000/365 =$141,780

So By tightening teh credit policy, Acct Rxable will reduce by 156164-141780 = $14,384.00

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