Firms usually offer their customers some form of trade credit. This allowance co

Question

Firms usually offer their customers some form of trade credit. This allowance comes with certain terms of credit, which will affect the actual cost of asset being sold for the buyer and the seller. Consider this case: Tasty Tuna Corporation buys most of its raw materials from a single supplier. This supplier sells to Tasty Tuna on terms of 3/10, net 60 The cost per period of the trade credit extended to Tasty Tuna, rounded to two decimal places, is Tasty Tuna's trade credit has a nominal annual cost of intermediate calculations to four decimal places, and your final answer to two decimal places.) , assuming a 365-day year. (Note: Round all If Tasty Tuna Corporation's supplier shortens its discount period to five days, this will trade credit. the cost of the

Explanation / Answer

Formula for cost per period trade credit = Discount%/(1 - Discount%)

= 3%/97%

= 3.09%

Formual for nominal annual cost of trade credit is given below

Discount %/(1-Discount %) x (365/(Allowed payment days – Discount days))

Dicount = 3%

Allowed Payment days = 60

Discount days = 10

Trade credit has a nominal annual cost = 3%/97% * 365/(60-10)

= 22.58%

If supplier shorten the discount period to 5 days then this will decrease cost of the trade credit.

Trade credit has a nominal annual cost = 3%/97% * 365/(60-5)

= 20.26%

It will be decrese by 2.32% approx.

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