Grunewald Industries sells on terms of 2/10 net 40. Gross sales last year were $4 562 500 and

QUESTION

Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were $4,562,500, and accounts receivable averaged $437,500. 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 non discount customers? (Hint: Calculate sales/day based on a 365-day year; then get average receivables of discount customers; then find the DSO for the non discount customers.)
Nominal cost of trade credit for non discount customers = 2/98*365/30 = 24.83% Working Note: forgone $2 discount is cost of using the money for (40-30) = 10 days therefore annualized cost is calculated as above. Effective cost of trade credit for non discount customers = (1

)^(365/30)-1 = 27.86% Working Note: forgone $2 discount is cost of using the money for (40-30) = 10 days therefore effective annual cost is calculated above using the compounding impact.

ANSWER:

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