Firms usually offer their customers some form of trade credit. This allowance co
ID: 2799386 • Letter: F
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: Purple Turtle Group buys most of its raw materials from a single supplier. This supplier sells to Purple Turtle on terms of 1/20, net 60. The cost per period of the trade credit extended to Purple Turtle, rounded to two decimal places, is , assuming a 365-day year. (Note: Round all Purple Turtle's trade credit has a nominal annual cost of intermediate calculations to four decimal places, and your final answer to two decimal places.) If Purple Turtle Group's supplier shortens its discount perlod to five days, this will credit. the cost of the tradeExplanation / Answer
Trade Credit Term offered to Purple Turtle is 1/20 net 60. It means discount of 1% if payment is made within 20 days of bill. Otherwise payment can be made upto maximum allowable days upto 60 days.
1. Cost per period of trade Credit assuming payment is made in 60 days period
(1+(discount/100-discount)^(365/60)-1) = (1+0.01/0.99)^(365/60)-1=6.30%
Cost per period = 0.1051% per day or per period
2. Assuming 365 days per year, annual cost of trade credit = Discount%/(1-Disount%) * [365/(full payment days-disount days)]
= 0.01/0.99 * (365/40)
=9.22%
3. Now supplier shortens its disount period to 5 days from 20 days. Now revised trade credit terms are 1/5, net 60.
Now we will use the same formula used in item no 2 above.
annual cost of trade credit = Discount%/(1-Disount%) * [365/(full payment days-disount days)]
= 0.01/0.99 * (365/55)=6.70%
Annual cost of trade credit will decrease if the supplier reduces discount period.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.