Prairie Manufacturing has four possible suppliers, all of which offer different

Question

Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table. (Note: Assume a 365-day year.)

Supplier - Credit terms

J 1/5 net 30 EOM

K 2/20 net 80 EOM

L 1/15 net 60 EOM

M 3/10 net 90 EOM

a. Calculate the approximate cost of giving up the cash discount from each supplier.

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 separately, 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

What you looking for is the trade credit formula

= (1 + (Discount/1-Discount)) ^ (365/days beyond discount) -1

I'll just do one since the rest are identical and you should be able to get the logic.

A. 1/5 net 30,
this means that the entire amount you owe is due in 30 days, however, if you pay within 5 days, you get a 1% discount.

I assume you don't take the discount and choose to pay the full amount on day 30. So here is what you are giving up.

therefore,

= (1 + .01/1-.01) ^ 365/ 30-5 -1
=(1+ .01/.9) ^ 365/25 - 1
= (1.01) ^ 14.60 -1
= 1.175070 -1
= .175070
*Again this is an annualized answer*

If you wanted it over a 30 day period, that is approx the following

365/30 = 12.1667 (that is how many 30 day periods there are in a year)

17.5070/12.1667 = 1.44

Hope that helps

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.