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Cash Discounts: Cost of Not Taking the Discount

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You place an order for 400 units of inventory at a unit price of $50. The supplier offers terms of 2/10, net 40.
a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit?
b. What is the discount being offered? How quickly must you pay to get the discount? If you do take the discount, how much should you remit?
c. If you don't take the discount, how much interest are you paying implicitly? How many days' credit are you receiving?

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Solution Summary

The effective cost of the loan arising from not taking the cash discount is calculated.

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a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit?

The account becomes overdue after 40 days.
If I take the full period I remit 400X$50= $ 20, 000

b. What is the discount being offered? How quickly must you pay to get the discount? If you do take the discount, how much should you remit?

A term of 2/10, net 40 means the customer will get a 2 percent discount if the bill is paid within 10 days from the invoice date.
If I take the discount I ...

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