Langley Clinics, Inc buys $400,000 in medical supplies each year (at gross price

Question

Langley Clinics, Inc buys $400,000 in medical supplies each year (at gross prices) from its major suppliers, consolidated services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount due on day 45 but it is considering taking the discount paying on day 10, and replacing the trade credit with a bank loan that has a 10% annual cost.
What is the amount of free trade credit that Langley obtains from consolidated services? (Assume 360days per year throughout this problem)

Explanation / Answer

2.5/10 Net 45 means a disc of 2.5% if paid within 10 days else make full payment within 45 days So if a cust doesn't take discount, he gets free credit for 45-10= 35 days You are getting a 2.5% discount on a 35-day advance in payments. There are (360/35) = 10.29 35-day periods in a year. Your EAR is 10.29 x 2.5% = 25.73% per year. Trade credit is 2.5%*400000 = 10000

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