Question

Consider the case of the Henderson Company.

Answer 1

Answer:

I) Days sales outstanding (DSO) for all customers?      48.7days

= (53*0.9)+(10*0.1) = 48.7 days

II) Net sales?                                                                  $166.600

The Net sales = Gross sales - sales allowance  

The discount amount due for the 10% discount customers = 2% of the 10% of 170 mn ==>  0.02 * 0.1 * 170 ===> 0.34 mn

∴ The Net sales = 17 - 0.34 mn = 16.66 mn

   Amount paid by discount customers?                     $13.600

Explanation:

I. General Credit Policy Information

  Credit stamps                                                               2/10 Net 30

  Days sales outstanding (DSO) for all customers    48.7days

  DSO for customers who take the discount (10%)      10days

  DSO for customers who forgo the discount (90%)    53days

II. Annual Credit Sales and Costs ($ millions)

  Gross sales                                                                 $170.000

  Net sales?                                                                   $166.600

  Amount paid by discount customers                      $13.600

  Amount paid by non discounted customers           $153.000

 Variable operating costs (82% of gross sales)         $139.40

 Bad debts                                                                    $0.0

 Credit evaluation & collection costs (10% of gross sales) $17.00

Answer 2

Answer:Answer:

DSO for all customers is approx. 49days

DSO for customers who take the 10days discount offer is 10days

DSO for the 90% credit customers is 53days

ii annual credit sales is $170million and annual variable costs is $139.4million ( 82% of Gross sales) and discount paid to the 10 percentile customer is $340,000 (2% of $17Million)

iii. Credit Evaluation costs is $17million (10% of Gross sales)

iv. Bad debts is zero

V. AR balance for total customers at year end is $23Million

vi. AR balance for customers who took the discount at year end is $472,000

vii. AR balance for the 90% credit customers at year end is $22.5Million

Explanation:

DSO is calculated as Accounts receivable balance divided by Total credit sales multiplied by number of days in the period reviewed

In this question the DSO for either circumstances was provided as 10days and 53days respectively.

By interposing for the 90% customers (53days = x divided by $153million multiplied by 360days) x being the unknown AR is derived to be $22.5m

By interposing for the 10% customers (10days = x divided by $17million multiplied by 360days) x being the unknown AR is derived to be $472,000

Total AR is thus derived to be $23million and to ta DSO is 49days.