RECEIVABLES INVESTMENT McEwan Industries sells on terms of 3/10, net 35. Total s
ID: 2792489 • Letter: R
Question
RECEIVABLES INVESTMENT
McEwan Industries sells on terms of 3/10, net 35. Total sales for the year are $1,863,500; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 66 days after their purchases. Assume 365 days in year for your calculations.
A) What is the days sales outstanding? Round your answer to two decimal places.
B) What is the average amount of receivables? Round your answer to the nearest cent. Do not round intermediate calculations.
$
C) What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.
%
D) What is the percentage cost of trade credit to customers who do not take the discount and pay in 66 days? Round your answers to two decimal places. Do not round intermediate calculations.
E) What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 35th day? Round your answers to two decimal places. Do not round intermediate calculations.
Days sales outstanding (DSO) = days
Average receivables = $
Explanation / Answer
Days sales outstanding = 40% customers paid within 10 days + 60% of the people paid on 66th day = 0.4* 10 + 0.6 * 66 = 4+ 39.6 = 43.6 days
Average amount of receivables = Total sales/ 365 * Days sales outstanding = $1,863,500/365 * 43.6 = $222,598.90
Nominal Cost of Credit = Discount Percentage/(100 - Discount percentage)]*365/(Days Credit Outstanding - Discount Period)
= [3/100-3] * [365/35-10]
= 3/97 * 365/25 = 0.0309278 * 14.6 = 0.451545 or 45.15%
Effective Cost = [1+(3/97)]^ 365/25 - 1 = 1.56002 - 1 = 0.56002 or 56%
For people paying in 66 days
Nominal Cost of Credit = Discount Percentage/(100 - Discount percentage)]*365/(Days Credit Outstanding - Discount Period)
= [3/100-3] * [365/66-10]
= 3/97 * 365/56 = 0.0309278 * 6.5178 = 0.20158 or 20.16%
Effective Cost = [1+(3/97)]^ 365/56 - 1 = 1.2196 - 1 = 0.2196 or 22%
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