Question

McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,326,00; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 82 days after their purchases. Assume 365 days in a year for your calculations.

d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 82 days?

Nominal cost %

Effective cost %

e. what would happen to McEwan's accounts receivable if it toughened up on its collections policy with the result that all nondiscount customers paid on the 30th day?

DSO= days

Average receivables = $

Answer 1

Cost of Trade Credit = [365/(f - p)] x [d/(1 - d)]

This is where:

• d is the discount
• f is the final due date
• p is the discount period

d). Cost of Trade Credit = [365 / (82 - 10)] x [0.03 / (1 - 0.030] = 5.069 x 0.0309 = 0.1568, or 15.68%

EAR = [1 + r/n]ⁿ - 1

= [1 + {0.1568/(365 / (82 - 10))}]^{[365 / (82 - 10)]} - 1 = 1.1670 - 1 = 0.1670, or 16.70%

e). If all non-discount customers will pay on the 30th day, the average accounts receivable will be:

DSO = [0.4 x 10] + [0.6 x 30] = 4 + 18 = 22 days

Average Receivables = DSO x [Sales / 365]

= 22 x [$1,326,000 / 365] = $79,923.29