Cost of trade credit to the customers
On the commercial side often we do see something similar in managing accounts receivable. One such standard policy or practice is termed 1/10Net30 - where the customer can take a 1% cash discount off of the invoice if paid within 10 days otherwise they pay the full amount within the normal 30 days. This provides an incentive to pay early and reduce DSO. However, is it worth the 1%? Also where might we put this discount amount in our financials? Thanks
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COST OF FORGOING 1% CASH DISCOUNT if payment Within 10 days rather than paying at 30 ...
Solution Summary
This explains the steps to compute the COST OF TRADE CREDIT TO THE CUSTOMER
Finance
Problem 16-6
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500. Forty percent of customers pay on the 10th day and take discounts; the other 60% pay, on average, 40 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 nondiscount customers paid on the 30th day?
Problem 16-7
Calculate the nominal annual coast of nonfree trade credit under each of the following terms. Assume that payment is made either on the discount date or on the due date.
a) 1/15, net 20
b) 2/10, net 60
c) 3/10, net 45
d) 2/10, net 45
e) 2/15, net 40