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annual cost of the trade credit

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The Thompson corporation projects an increase in sales from $1.5 million to $2 milliion, but needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable.Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days- paying in 65 days and thus becoming 35 days past due- without a penalty because its suppliers currently have excess capacity.

What is the effective, or equvialent, annual cost of the trade credit?

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The Thompson corporation projects an increase in sales from $1.5 million to $2 milliion, but needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer ...

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This solution exemplifies annual cost of the trade credit.

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What is the effective, or equivalent, annual cost of the trade credit?

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1. The Thompson Corporation projects an increase in sales from $1.5 to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days-paying in 65 days and thus becoming35 days past due-without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit?

2. Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of just how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000-this is her target cash balance. (Disregard cash in the till, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January and February are shown below. Purchases during November amounted to $140,000.

Sales Purchases
December $160,000 $40,000
January 40,000 40,000
February 60,000 40,000

a. Prepare a cash budget for December, January, and February.
b. Now suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this questions are minimal.)

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