Question

Compute the cost of not taking the following cash discounts. (Use a 360-day year. Do not round intermediate calculations. Input your final answers as a percent rounded to 2 decimal places.)
  

	Cost of Lost Discount a. 2/10, net 40 24.49 % b. 2/15, net 30 % c. 2/10, net 45 20.99 % d. 3/10, net 90 13.92 %

Answer 1

Solution:

a.2/10, net 40

The formula for calculating the cost of not taking a cash discount

= [ Discount % / ( 100 – Discount % ) ] * [ 360 / ( Days allowed for payment - Discount period ) ]

As per the information given in the question we have

Discount % = 2 % = 0.02   ; Discount period = 10 ; Days allowed for payment = 40 days   ;

Applying the above values in the formula we have

= [ 2 / ( 100 – 2 ) ] * [ 360 / ( 40 – 10 ) ]

= ( 2 / 98 ) * (360 / 30 )

= 0.020408 * 12 = 0.244896

= 0.244896 * 100 = 24.4896 %

=24.49 % ( when rounded off to two decimal places )

Thus the cost of not taking a cash discount = 24.49 % .

b. 2/15, net 30

The formula for calculating the cost of not taking a cash discount

= [ Discount % / ( 100 – Discount % ) ] * [ 360 / ( Days allowed for payment - Discount period ) ]

As per the information given in the question we have

Discount % = 2 % = 0.02   ; Discount period = 15 ; Days allowed for payment = 30 days   ;

Applying the above values in the formula we have

= [ 2 / ( 100 – 2 ) ] * [ 360 / ( 30 – 15 ) ]

= ( 2 / 98 ) * (360 / 15 )

= 0.020408 * 24 = 0.489792

= 0.489792 * 100 = 48.9792 %

= 48.98 % ( when rounded off to two decimal places )

Thus the cost of not taking a cash discount = 48.98 % .

c. 2/10, net 45

The formula for calculating the cost of not taking a cash discount

= [ Discount % / ( 100 – Discount % ) ] * [ 360 / ( Days allowed for payment - Discount period ) ]

As per the information given in the question we have

Discount % = 2 % = 0.02   ; Discount period = 10 ; Days allowed for payment = 45 days   ;

Applying the above values in the formula we have

= [ 2 / ( 100 – 2 ) ] * [ 360 / ( 45 – 10 ) ]

= ( 2 / 98 ) * (360 / 35 )

= 0.020408 * 10.285714 = 0.209911

= 0.209911 * 100 = 20.9911 %

= 20.99 %  ( when rounded off to two decimal places )

Thus the cost of not taking a cash discount = 20.99 % .

d. 3/10, net 90

The formula for calculating the cost of not taking a cash discount

= [ Discount % / ( 100 – Discount % ) ] * [ 360 / ( Days allowed for payment - Discount period ) ]

As per the information given in the question we have

Discount % = 3 % = 0.03   ; Discount period = 10 ; Days allowed for payment = 90 days   ;

Applying the above values in the formula we have

= [ 3 / ( 100 – 3 ) ] * [ 360 / ( 90 – 10 ) ]

= ( 3 / 97 ) * (360 / 80 )

= 0.030928 * 4.5 = 0.139176

= 0.139176 * 100 = 13.9176 %

= 13.92 % ( when rounded off to two decimal places )

Thus the cost of not taking a cash discount = 13.92 % .