Question

Leyton Lumber Company has sales of $9 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $2.25 million. Assume 365 days in year for your calculations.

1. What is Leyton's DSO? Round your answer to two decimal places.
     days
2. 
   
3. What would DSO be if all customers paid on time? Round your answer to two decimal places.
     days
4. 
   
5. How much capital would be released if Leyton could take actions that led to on-time payments? Round your answer to the nearest cent. Write out your answer completely. For Example, 13.2 million should be entered as 13,200,000.
   $

*****PLEASE LABEL ALL ANSWERS. CLEARLY AND MAKE. SURE YOUR. ANSWERS ARE. CORRECT!!!****

Answer 1

a. Sales = $9 million, Accounts receivable = $2.25 million, No days in a year = 365

We know that, Days of sales outstanding = (Account receivable / Sales) x 365 = (2.25 / 9) x 365 = 91.25 days

Hence DSO = 91.25 days

b. It is given that Leyton Lumber has credit terms calling for payment in within 30 days. Hence if all customers paid on time, then customers will follow the credit terms of company and would like to pay within 30. But however all customers would like to make use of full credit period and there would not be any sense for any customer to pay to before 30 days. Hence average customer would pay on 30th day. Therefore sales would be outstanding for 30 days

Hence Days of sales outstanding if all customers paid on time = 30 days

c.If company took action and then 0ne time payment by all customers would be made within 30 days according to credit terms of the company. But customers would like to pay on 30th day to take full advantage of credit period. Hence

Days of sales outstanding = 30 days

Sales = 9 million = 9000000, Original Account receivable = 2.25 million = 2250000

Account receivable for DSO of 30 days = (Days of sales outstanding x sales) / 365 = (30 x 9000000)/ 365 = 739726.0274

Capital free up = Original Account receivable - Account receivable for DSO of 30 days = 2250000 - 739726.0274 = 1510273.9726 = 1510273.97

Hence Capital Free up = 1510273.97