Question

Grunewald Industries sells on terms of 2/10, net 30. Gross sales last year were $4,299,000, and accounts receivable averaged $412,000. 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.

Answer 1

Answer : Calculation of Nominal trade cost :

Sales per day = 4,299,000 / 365 = 11778.0821917

Discount Sales = 11778.0821917 * 0.50 = 5889.04109585

Accounts Receivable of Discount Sales = 5889.04109585 * 10 days = 58890.4109585

Balance is for Accounts Receivable on Non discount .

Days sales outstanding = Average Receivable / Daily saels = 412000 / 11778.0821917 = 34.9802279602 days or 35 days

Says sales outsatanding = [10 days * 0.50] + [Days sales outsatnding of Non discount custome * 0.50]

34.9802279602 = 5 + 0.50*Days sales outsatnding of Non discount custome

==> Days sales outsatnding of Non discount customer = 29.9802279602 / 0.5 = 59.9604559204 days

Nominal Cost = (2 / 98) * [365 / (59.9604559204 - 10)] = 14.90% or 14.91%

Effective Cost = [1 + (2/98)]^(365 / (59.9604559204 - 10)] = 15.89% or 15.90%