Question
In: Accounting
Explain the trade credit facility provided by some companies to their customers that allow them to...
Explain the trade credit facility provided by some companies to their customers that allow them to manage their day-to-day liquidity situation and calculate the opportunity cost of an invoice that specifies the following conditions, as shown below (a. – c.): a) conditions: 1.25/10, n/30. b) conditions: 1.25/10, n/60. c) conditions: 1.5/10, n/60
Solutions
Expert Solution
Trade credit facility is the credit facility provided within the trade, between supplier and the purchasers of the transaction. The trade credit facility usually provided in form of Discount offered 10% ,if payment is made within particular period.
Opportunity Cost: It is the cost of the forgone benefit over the selection of the other alternative.
The Cost of Credit in All conditions are as follow:
| Situation | Option | Cost of Effective Interest | Opportunity Cost | |||||
| a) | 1.25/10, n/30 | 22.78% | 22.78 | |||||
| b) | 1.25/10, n /60 | 9.11% | 9.11 | |||||
| c) | 1.5/10 , n/60 | 10.96% | 10.96 | |||||
| Let Suppose the Sale Value is 100 | ||||||||
| As with discount only 98.75 shall be paid, over the period of 10 days. | ||||||||
| Effective interest rate provided over a period is 22.78 actual over a period of 30 days. | ||||||||
Similar explanation for other situation also.
ekkarill92 answered 1 year agoRelated Solutions
16. Cost of trade credit Firms usually offer their customers some form of trade credit. This...
16. Cost of trade credit
Firms usually offer their customers some form of trade credit.
This allowance comes with certain terms of credit, which affect the
cost of asset of sale for the buyer as well as the seller.
Consider this case:
Free Spirit Industries Inc. buys on terms of 2.5/15, net 45 from
its chief supplier.
If Free Spirit receives an invoice for $1,545.78, what would be
the true price of this invoice?
$2,110.00
$1,281.07
$1,507.14
$1,582.50
The nominal...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to
increase by $200,000 per year if credit is extended to these new
customers. Of the new accounts receivable generated, 6%
are projected to be uncollectible. Additional collection
costs are projected to be 5% of incremental sales, and production
and selling costs are projected to be 78% of sales. Your
firm expects to pay a total of 30% of its...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers that
previously have been denied credit because they were considered
poor risks. Sales are projected to increase by $150,000 per year if
credit is extended to these new customers. Of the new accounts
receivable generated, 7% are projected to be uncollectible.
Additional collection costs are projected to be 3% of incremental
sales (whether they actually end up collected or not), and
production and selling costs are projected to be 80% of...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers that
previously have been denied credit because they were considered
poor risks. Sales are projected to increase by $150,000 per year if
credit is extended to these new customers. Of the new accounts
receivable generated, 7% are projected to be uncollectible.
Additional collection costs are projected to be 3% of incremental
sales (whether they actually end up collected or not), and
production and selling costs are projected to be 80% of...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $200,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 5%
of incremental sales, and production and selling costs are
projected to be 78% of sales. Your firm expects to pay a total...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $240,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 6% are projected to be
uncollectible. Additional collection costs are projected to be 2%
of incremental sales (whether they actually end up collected or
not), and production and selling costs are projected to be 78% of...
Proposal #1 would extend trade credit to some customers that previously have been denied credit because...
Proposal #1 would extend trade credit to some customers
that previously have been denied credit because they were
considered poor risks. Sales are projected to increase
by $150,000 per year if credit is extended to these new customers.
Of the new accounts receivable generated, 7% are projected to be
uncollectible. Additional collection costs are projected to be 3%
of incremental sales (whether they actually end up collected or
not), and production and selling costs are projected to be 80% of...
Bilbo Bags & Things makes fashionable handbags. They are considering extending trade credit to some customers...
Bilbo Bags & Things makes fashionable handbags. They are
considering extending trade credit to some customers previously
considered poor risks. The following estimations are made for this
new customer base:
Sales would increase by $100,000 if credit is extended to these
new customers.
Production and selling costs will be 80% of sales.
All sales will be on credit, and 10% of them will prove to be
uncollectible.
Additional collection costs will be 5% of sales, and
Customer Service costs will...
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