P Manufactering has four possible suppliers all of which offer different credit

Question

P Manufactering has four possible suppliers all of which offer different credit terms but their products and services are virtually identical.

Supplier J 1/5 net 30 EOM

Supplier K 2/20 net 80 EOM

Supplier L 1/15 net 60 EOM

M 3/10 net 90 EOM

b) if the firm needs short-term funds, which are currently available from its commercial bank at 9%, and if each of the suppliers is viewed sepperately, which, if any, of the suppliers' cash discounts should the firm give up? Explain why

c) Now assume that the firm could stretch by 30 days its accounts payable (net period only) from supplier M. What impact, if any, would that have on your answer in part b relative to this supplier.

Explanation / Answer

Solution-

b)

Supplier J = (0.01*(365/30))

Supplier J = 12.17%

Supplier K = (0.02*(365/80))

Supplier K = 9.13%

Supplier L = (0.01*(365/60))

Supplier L = 6.08%

Supplier M = (0.03*(365/90))

Supplier M = 12.17%

Supplier L because it has a lower discount than the 9 percent from the bank.

Solution-c)

Approximate cost of giving up the cash discount

Supplier M =(0.03*(365/120))

Supplier M = 9.13%

Although its comes near of the 9 percent of the bank, So, the solution or answer remains the same for the fact that cost of the giving the cash discount over the 9 percent.

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