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Industries sells on terms of 3/10, net 50
Industries sells on terms of 3/10, net 50. Gross sales last year were $4,380,000 and accounts receivable averaged $450,000. Half of Grunewald's customers paid on the 10th day and took discounts. What are the nominal and effective costs of trade credit to Grunewald's nondiscount customers? (Hint: Calculate daily sales based on a 365-day year, calculate the average receivables for discount customers, and then find the DSO for the nondiscount customers.) Do not round intermediate calculations. Round your answers to two decimal places.
Nominal cost of trade credit: %
Effective cost of trade credit: %
Expert Solution
Solution
| Sales Per day = | 4380000/365 = | 12000 |
| Discount sales = | 12000*.5 | 6000 |
| A/R attributable to discount customers = | 6000*10 | 60000 |
| A/R attributable to nondiscount customers: | ||
| accounts receivable averaged | 450000 | |
| Less: Discount AR customers | 60000 | |
| Non Discount customers A/R | 390000 | |
| Days sales outstanding nondiscount customers = AR / Sales per day = 345335.60 / 5916.44 | 65 | days |
| Non discount customers are suppposed to pay within 50 days they are paying in average of 58.37 days | ||
| Cost of trade credit to non discount customers equals the rate of return of the firm | ||
| Nominal rate = (3/97) x (365 / 65-10)) = | 20.52% | |
| Effective cost = (1+(3/97))^(365/(65-10)) - 1 = | 22.40% |
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