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

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 are 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

Calculation of approximate cost of giving up the cash discount from each supplier: Supplier Credit Terms Discount Days Cost J 2/10 net 30 EOM 2% 20 days 36.50% (30-10) 2%*365/20 K 3/20 net 80 EOM 3% 60 days 18.25% (80-20) 3%*365/60 L 2/10 net 70 EOM 2% 60 days 12.17% (70-10) 2%*365/60 M 2/20 net 90 EOM 2% 70 Days 10.43% (90-20) 2%*365/70

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