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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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