Question

P16-2 Cost of giving up early payment discounts  Determine the cost of giving up the discount under each of the following terms of sale. (Note: Assume a 365-day year.)

1. 2/10 net 30.

2. 1/10 net 30.

3. 1/10 net 45.

4. 3/10 net 90.

5. 1/10 net 60.

6. 3/10 net 30.

7. 4/10 net 180.

Answer 1

Cost of trade credit or cost of giving up discount formula = Discount %/(1-discount %)*365/(payment days - discount days)

a. 2/10 means 2% discount for payment made within 10 days, otherwise payable in full by days 30

so discount % = 2%

discount days = 10

payment days = 30

cost of giving up discount = 2%/(1-2%)*365/(30-10)

=0.3724489796 or 37.24%

answer is 37.24%

b 1/10 net 30.

cost of giving up discount = 1%/(1-1%)*365/(30-10)

=0.1843434343 or 18.43%

answer is 18.43%

c.

1/10 net 45.

cost of giving up discount = 1%/(1-1%)*365/(45-10)

=0.1053391053 or10.53%

d.

3/10 net 90

cost of giving up discount = 3%/(1-3%)*365/(90-10)

=0.1411082474 or14.11%

e

1/10 net 60

cost of giving up discount = 1%/(1-1%)*365/(60-10)

=0.07373737374 or 7.37%

f.

3/10 net 30.

cost of giving up discount = 3%/(1-3%)*365/(30-10)

=0.5644329897

or 56.44%

g.

4/10 net 180.

cost of giving up discount = 4%/(1-4%)*365/(180-10)

=0.08946078431 or 8.95%