Cash discount decisions Prairie Manufacturing has four possible suppliers, all o

Question

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

a) Let price of Commodity be 1,000 Cost of giving discount Supplier Cost Cost in terms of % WN J(1000*1%) 10 14.40% 1% *360/25 K (1000*2%) 20 12% 2% *360/60 L(1000*1%) 10 8.00% 1% *360/45 M(1000*3%) 30 13.50% 3% *360/80 b) firm should give up cash discount of Suppliers whose cost of finance is less than commercial bank. Thus company should give up discount of 8% This is because if the company borrows from bank @9% it would want more discount from its suppliers in order to gain. c) Supplier Cost Cost in terms of % WN M(1000*3%) 30 9.82% 3% *360/110 Answer would not change as still discount is more than 9%

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