Grunewald Industries sells on terms of 1/10, net 40. Gross sales last year were
ID: 2744589 • Letter: G
Question
Grunewald Industries sells on terms of 1/10, net 40. Gross sales last year were $4,699,000, and accounts receivable averaged $472,000. 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.
a) Nominal cost ______%
b) Effective cost ______%
Explanation / Answer
Answer 1.
Sales per day = $4,699,000/365 = $12,873.97
Discount Sales = 0.50*12,873.97
Discount Sales = $6,436.99
A/R attributable to discount customer = 6,436.99*10
A/R attributable to discount customer = $64,369.9
A/R attributable to non-discount customer :
Total A/R = $472,000
Discounted Customer = $6,436.99
Non-Discount Customers’ A/R = $465,563.01
DSO = 472,000/12,873.97 = 36.66 Days
36.66 = 0.50*10 + 0.5*DSO(Non-Account)
DSO(Non-Account = 63.32 Days
Thus, although non discount customers are supposed to pay within 40 days, they are actually paying on average, in 63.32 Days
Answer 2
Cost of trade credit to non discount customers equals the rate of return to the firm :
Nominal rate = (discount / (1-discount))*(365/(Full allowed payment days – Discount Days))
Nominal rate = (0.01/0.99)*(365/53.32) = 6.91%
Effective Rate = (1+1/99)^(365/53.32) – 1 = 7.12%
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