Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 2a) McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the

Question
2a) McDowell Industries sells on terms of 4/10, net 40. Total sales for the year are $825,500. Thirty percent of customers pay on the 15th day and take discounts; the other 70% pay, on average, 60 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 McDowell toughened its collection policy with the result that all non-discount customers paid on the 40th day?
2b) International Industries sells on terms of 3/10, net 50. Gross sales last year were 5,662,500 and accounts receivable averaged 547,500. Half of Internationals customers paid on the 15th day and took discounts. What are the nominal and effective costs of trade credit to Internationals non-discount customers? (Hint: Calculate sales/day based on a 360-day year, then calculate average receivables of discount customers and then find the DSO for the non-discount customers.
2c) The D.J. Masson Corporation needs to raise 500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net90, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 90th day, and thereby obtain the needed $500,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essential Personal Finance A Practical Guide For Students

Authors: Lien Luu, Jonquil Lowe, Jason Butler, Tony Byrne

1st Edition

1138692956, 978-1138692954

More Books

Students also viewed these Finance questions

Question

=+7. Judy authorized the trust fund to purchase mutual fund shares.

Answered: 1 week ago