Grunewald Industries sells on terms of 3/10, net 40. Gross sales last year were
ID: 2733027 • Letter: G
Question
Grunewald Industries sells on terms of 3/10, net 40. Gross sales last year were $4,398,000, and accounts receivable averaged $440,500. 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 get average receivables of discount customers; then find the DSO for the nondiscount customers.) Do not round intermediate calculations. Round your answers to two decimal places. Nominal cost % Effective cost %
Explanation / Answer
Sales per day = $12,050
Discount Sales = 50% of 12,050 = $6,025
Account Receivable attributed to discount customer = $6,025 x 10 = $60,250
Non Discount Customer Account receivable = $(440,500 - 60,250) = $380,250
Alternatively, DSO = $440,500 / $12,050 = 37 days
37 = 0.5 (10) + 0.50 ( DSOnondiscount)
DSOnondiscount = 32 / 0.50 = 64 days
Thus, Although the non discount customers are supposed to pay withine 40 days but they are actually paying on average, in 64 days.
Nominal cost Cost = 3/97 x 365/52 = 0.0309 (7.019) = 21.69%
Effective cost = (1 + 3/97)365/52 - 1 = 1.2381 - 1 = 0.2381 or 23.81%
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