Please answer the following questions (excel formulas are greatly appreciated) L
ID: 2800981 • Letter: P
Question
Please answer the following questions (excel formulas are greatly appreciated)
Langley Clinics, Inc., buys $400,000 in medical supplies each year (at gross price) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount on Day 45, but it is considering taking the discount, paying on Day 10, and replacing the trade credit with a bank loan that has a 10 percent annual cost a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (assume 360 days per year) Discount percentage Gross price of supplies purchased Discounted purchase price Days in Year Daily trade credit Discount period Free trade credit b. What is the amount of costly trade credit? Net Payment due Total Trade Credit Free Trade Credit Costly Trade Credit c. What is the approximate annual cost of the costly trade credit? Discount percent Days credit received Discount period Days per year Approximate % costExplanation / Answer
a.
Free trade amount = (((100%-2.5) * Cost) / Days per year) * paying on day 10 (10)
= (0.975 * $400,000)/360 * 10
= $1083.333 * 10
= $10,833.33
b.
Amount of costly trade credit = (Amount due day * 1083.33) - Free trade amount
= (45 * 1083.33) – 10833.33
= 48750 - $10,833.33
= $37,916.67
c.
Approximate annual cost of the trade credit = (2.5/97.5) * (360/35)
= 26%
d.
He should alter trade credit with loan from the bank only if they get superior cost than 26% which they now have.
e.
The cost trade credit must be replaced minus the $10033.33 of free trade credit.