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Question

You are the accountant for Suite Dreams, a retail furniture store. Recently, an order of sofas and chairs was received from a manufacturer with the terms of 3/15, n/45. The order amount to $230,000, and Suite Dreams can borrow money at 13% ordinary interest. A)How much can be saved by borrowing the funds for 30 days to take advantage of the cash discount? (Remember, Suite Dreams must borrow only the net amount due after the cash discount is taken.) B)What would you recommend?`

Answer 1

Their discount 3% if payed in 15 days of $230,000 would be $6900, subtract and they would pay $223,100. If you borrow that amount at 13% for 30 days it would cosy you $2416.92 for one month. So subtracting $2416.92 from $6900 would save you $4483.08 by taking advantage of the is discount and borrowing the cash for 30 days.