Good Evening, I really need assistance with the below, #4 specifically. Rob McMi

Question

Good Evening, I really need assistance with the below, #4 specifically.

Rob McMillan finished reading the article in the local paper, "Fuel Prices Expected to Increase into Summer." The article cited major factors in the crude oil spike such as Iran's nuclear program and overall Mideast instability. Rob, an independent fuel oil and propane distributor in rural Virginia, thought this wasn't good news. It had been a moderate winter, but wholesale fuel prices were higher than normal. Rob grabbed the last invoice from his supplier and saw that fuel oil was priced at $1.964 per gallon, with trade discounts of 7/5/2.5 available. It seemed like those discounts were not as good as in the past. McMillan Oil offers its own customers credit terms of 2/15, net/30, with a 1% service charge on late payments. Of the $25,000 in average fuel oil sales per month, normally half of Rob's sales are paid within the discount period, and only 5% incur the monthly service charge. Rob is concerned because a number of his fuel oil customers are behind in their payments, and he is considering some changes.

1.Using the starting price of $3.353 per gallon, what is Rob's net price after applying the 7/5/2.5 trade discount series using the net decimal equivalent?

2.Rob is considering purchasing his fuel oil from a new supplier offering fuel oil at $3.561 per gallon, but with a better trade discount series of 10/7/4. Compared to your answers in Exercise 1, which supplier would be a better deal for his company?

3.Using the average monthly sales of $25,000, what is the total savings enjoyed by those fuel oil customers who normally pay within the discount period? What is the total penalty paid by those that are delinquent over 30 days?

4.Currently, only 25% of the sales volume is paid by customers who are taking advantage of the discount, and 20% of the sales are over 30 days. Using these figures, how does that change your results from Exercise 3 above? Because your answers show that Rob is presently making more money (at least he should), why should he be concerned about the current situation? What suggestions do you have?

Explanation / Answer

1) =3.353*(1-7%)*(1-5%)*(1-2.5%)
=$2.888

2)=3.561*(1-10%)*(1-7%)*(1-4%)
=$2.861 and this is better price than old supplier and this is better deal

3)Half of them pay within discount period and enjoy 2% discount. so 50% of 25000= $12,500 represents 98% or 0.98 of the amount that Rob would have received if there hadn't been any discount. If we call this non-discounted amount X, then 12500=0.98X, so X=12500/0.98=$12755.10
savings= 12755.1-12500=$255.1
The remaining $12,500 is paid by customers and 5% of this amount=5%*12500=$625 incurs the 1% service charge for late payment. The service charge amount is 1% of $625=$6.25.

4)Let S is the sales volume , because of the discount arrangement, Rob receives 0.98*S/4 (25%) = 0.245S from those customers paying within the discount period and S/5 (20%) paying within 30 days. 55% (100-25-20) of the sales volume is being paid after 30 days for which the penalty service charge applies. The total servie charge on 0.55S is 0.01*0.55S=0.0055S. In terms of revenue, he receives (0.245+0.2+0.0055)S=0.4505S.

The money he lost is what paid within discount terms and it is 0.25*0.02S=0.005S and he should receive 0.995S a month.The main problem he has is that late payments affect the ability to purchase fuel and other goods and commodities in time . The service charge penalties for late payment are not contributing much to his revenue.

He should encourage custoemrs to pay in less than 30 days by giving more trade discounts if they pay within 15 days of purhase and also by increasing penality for late payments

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