Receivables investment McDowell Industries sells on terms of 3/10, net 30. Total
ID: 2721405 • Letter: R
Question
Receivables investment
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $715,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 50 days after their purchases. Assume 365 days in year for your calculations.
What is the days' sales outstanding? Round your answer to two decimal places.
days
What is the average amount of receivables? Round your answer to the nearest cent.
$
What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.
%
What is the percentage cost of trade credit to customers who do not take the discount and pay on Day 50? Round your answers to two decimal places.
Nominal cost: %
Effective cost: %
What would happen to McDowell’s accounts receivables if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day? Round your answers to two decimal places.
DSO = days
Average receivables = $
Explanation / Answer
days' sales outstanding= 40%*10+ 60%*50=4+ 30= 34 days
days' sales outstanding=(average amount of receivables/Total sales for the year)*365
=>average amount of receivables=(days' sales outstanding*Total sales for the year)/365
=>average amount of receivables=(34*715,000)/365
average amount of receivables=$ 66602.74
%cost of trade credit to customers who take the discount=0%
Nominal %cost of trade credit to customers who do not take the discount=(.03/.97)*(365/40)=28.22%
Effective %cost of trade credit to customers who do not take the discount=((1+.03/.97)^(365/40))-1=32.04%
if McDowell toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day
days' sales outstanding= 40%*10+ 60%*30=4+ 18= 22 days
=>average amount of receivables=(days' sales outstanding*Total sales for the year)/365
=>average amount of receivables=(22*715,000)/365
average amount of receivables=$ 43095.89
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