Taos Company purchased merchandise for resale from Tuscon Company with an invoic

Question

Taos Company purchased merchandise for resale from Tuscon Company with an invoice price of $26,800 and credit terms of 3/10, n/60. The merchandise had cost Tuscon $18,278. Taos paid within the discount period. Assume that both buyer and seller use a perpetual inventory system. The question: Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 11% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Use 365 days a year. Round your intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Taos (the buyer) purchased the merchandise for $26800. They paid within the discount period The cash discount was 3% 3% X $26800 = $804 The buyer's net savings are $804 The saving rate they "earn" by taking advantage of the discount is: 60 - 10 = 50 365 / 50 = 7.3 7.3 X 3% = 21.9% per annum

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