Question

Milberg Manufacturing sells on terms of 2/10, net 30. Total sales for the year are $4,500,000. Twenty-five percent of customers pay on the 10th day and take discounts; the other 75% pay, on average, 45 days after their purchases.

a.         What is the days sales outstanding?

b.         What is the average amount of receivables?

c.         What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 35th day?

Answer 1

b) Since 25% customers avail 2% discount

Sales on 10 days Credit = 4500000 * 0.25 = 1,125,000 per year

Sales per day = 1,125,000 / 360 = 3125 per day

Average Accounts Recievable of 2% discout sale = 3125*10 = 31250

Sales on 45 days credit = 4500000 * 0.75 = 3,375,000

Sales per day = 3,375,000 / 360 = 9375

Average Accounts Recievable of non discount credit sales = 9375*45 = 421875

Total Average Accounts Recievable = 421875 + 31250 = 453,125

a) Days sales outstanding = Accounts Recievable / Average Sales Per day

DSO = 453125 / (4500000/360) = 36.25 days

c) If 35 Days policy adapted

Average Accounts Recievable of non discount credit sales = 9375*35 = 328125

Total Average Accouts recievabe if 35 days collection policy adopted = 328125 + 31250 = 359,375