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Chapter 3: 21BP (page 251)

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/15, net 85. Mr. Warner never takes the discount offered, but he pays his suppliers in 75 days rather than the 85 days allowed so he is sure the payments are never late. What is Mr. Warner’s cost of not taking the cash discount?

Short Answer

Expert verified

The cost of not taking the discount is 18.54%.

Step by step solution

01

Information provided in the question

Discount = 3%

Discount period = 15 days

Payment period =85 days

02

Calculation of cost of not taking discount

The cost of not taking the discount is 18.54%.

Costofnottakingdiscount=Discountpercentage100%-Discountpercentage×360Finalduedate-Discountperiod=3%97%×36075-15=18.54%

Mr Warner pays the credit within 75 days, therefore, the final due date is taken as 75 days instead of 85 days.

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Most popular questions from this chapter

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

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Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.

a. What is the level of accounts receivable to support this sales expansion?

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