Question

McEwan Industries sells on terms of 3/10, net 35. Total sales for the year are $1,461,000; 40% of the customers pay on the 10^th day and take discounts, while the other 60% pay, on average, 50 days after their purchases. Assume 365 days in year for your calculations.

1. What is the days sales outstanding? Round your answer to two decimal places.
     days
2. 
   
3. What is the average amount of receivables? Round your answer to the nearest cent. Do not round intermediate calculations.
   $
4. 
   
5. What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.
   %
6. 
   
7. What is the percentage cost of trade credit to customers who do not take the discount and pay in 50 days? Round your answers to two decimal places. Do not round intermediate calculations.

   Nominal cost:	%
   Effective cost:	%

8. 
   
9. 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 35^th day? Round your answers to two decimal places. Do not round intermediate calculations.
   Days sales outstanding (DSO) =   days
   
   Average receivables = $

Answer 1

a. No of days sales outstanding = (40% * 10days) + (60% * 50 days) = 34 days

b. Average receivables = (Sales / Total no of days) * No of sales days outstanding = ($1,461,000 / 365) *34 = $136,093.15

c. Percentage of cost = 3/ 97 * 365/ 25 = 45.15% [ 25 days is the time to pay without availing discount from the 10th day]

d. Nominal Cost = 3/ 97 * 365/ 40 = 28.22%

Effective cost = (1+3/97) 365/40 -1 = 32.04%

e.

No of days sales outstanding = (40% * 10days) + (60% * 35 days) = 25 days

Average receivables = (Sales / Total no of days) * No of sales days outstanding = ($1,461,000 / 365) *25 = 100,068.49