Mike runs a police uniform retail store. He received a shipment on October 10, 2
ID: 2476257 • Letter: M
Question
Mike runs a police uniform retail store. He received a shipment on October 10, 2015; the terms were 4/10, 2/30, N60. The invoice amount was $10,000, and Mike makes a 30% markup on the cost for each item he sells. When will Mike have to pay the invoice if he wants to take advantage of the 4% discount? How much will Mike owe if he is able to pay within 10 days? How much will he owe if he can pay within 30 days? On October 18, Mike sends in a partial payment of $2,400. How much credit should he receive on his account? What is the balance owed after he makes this payment? BONUS (3 points): Mike approaches his banker about borrowing money so he can take advantage of the cash discounts. What is the equivalent interest rate of the 4% discount? The 2% discount? HINT: use the number of days between each discount and the due date if no discount is taken)
Explanation / Answer
4/10, 2/30,N60 means that a discount of 4% will be offered if payment is made by tenth day, a discount of 2% will be offered if the payment is made by the 30th day and full payment has to be made by the 60th day.
(i) to take the advantage of 4% discount, payment will have to be made by the 10th day (i.e on or before the 10th day).
(ii) If Mike pays within 10 days, 4% will be offered as discount. Net payment = 100% -4% = 96%. Thus payment = 96% of the invoice amount = 96% of $10,000 = $9,600.
(iii) if payment is made within 30 days, 2% will be offered as discount. Net payment = 100% - 2% = 98%. thus payment = 98% of the invoice amount = 98% of $10,000 = $9,800.
(iv) credit for $2400 partial payment = 2400*applicable discount = 2400*4% = $96. Amount due = total - partial payment - discount = 10,000 - 2400-96 = $7,504
(v) interest rate in case of 4% discount = discount %/(100-discount %)*365/(full term - discount period)
= 4%/96%*365/(60-10)
= 4/96*365/50 = 30.42%
interest rate in case of 2% discount = discount %/(100-discount %)*365/(full term - discount period)
= 2%/98%*365/(60-30)
= 2/98*365/30
= 24.83%