Answer:
Nominal 24.83%
Effective 27.86%
Explanation:
Terms 2/10, n/40 means there is a discount of 2% is available on payment of due amount within discount period of 10 days after sale with net credit period of 40 days.
Gross Sales = $4,380,000
Received within 10 days = $2,190,000
As $2,190,000 of Gross sales payments are made within discount period, discount will be availed on this value.
Discount = $2,190,000 x 2% = $43,800
Nominal Cost of trade = 2%
Effective cost of Trade
Nominal Cost of trade = 2% / (1 - 2%) x (365 / (40 -10 )
Nominal Cost of trade = 24.83%
Effective cost of Trade = ( 2%/(1-2%) )^(365/(40-10)) - 1
Effective cost of Trade = 27.86%
Answer:
Nominal cost = 17.7 %.
Effective cost = 19.2 %
Explanation:
Calculate daily sales based on a 365-day year,
calculate the average receivables for discount customers,
find the DSO for the nondiscount customers
Sales per day = $4,380,000 / 365 days = $12,000
Discounted sales = 0.50 ($12,000) = $6,000
Accounts receivable attributable to discount customers = 10 * $6,000 = $60,000
Accounts receivable attributable to non-discount customers = $493,500 - $60,000 = $433,500
Alternatively
$493,500 / $12,000 = 41.13 days i.e. 41 days
41 days = 0.50 (10) + .50 * DSO nondiscount
Non discount = 36/.50 = 72 days
Non discount are require to pay in 40 days but they are paying in 72 days
Effective cost = (1 + 2/98 ) ^ (365 / 42) - 1
1.192 - 1 = 0.192 = 19.2 %
Nominal cost = 2/98*365/42 = 0.177 = 17.7 %.
