Rob McMillan finished reading the article in the local paper, “Fuel Prices Expected to Increase into
Summer.” The article cited major factors in the crude oil spike such as Iran’s nuclear program and
overall Mideast instability. Operating as an independent fuel oil and propane distributor in rural Virginia,
this wasn’t good news for Rob. It had been a moderate winter, but wholesale fuel prices were
higher than normal. Rob grabbed the last invoice from his supplier and saw that fuel oil was priced
at $1.964 per gallon, with trade discounts of 7/5/2.5 available. It seemed like those discounts were
not as good as in the past. McMillan Oil offers its own customers credit terms of 2/15, net/30, with
a 1% service charge on late payments. Of the $25,000 in average fuel oil sales per month, normally
half of Rob’s sales are paid within the discount period, and only 5% incur the monthly service
charge. Rob is concerned because a number of his fuel oil customers are behind in their payments,
and he is considering some changes.
1. Using the starting price of $1.964 per gallon, what is Rob’s net price after applying the 7/5/2.5 trade discount series using the net decimal
2. Rob is considering purchasing his fuel oil from a new supplier offering fuel oil at $2.086 per gallon, but with a better trade discount series
of 10/7/4. Compared to your answers in Exercise 1, which supplier would be a better deal for his company?
3. Using the average monthly sales of $25,000, what is the total savings enjoyed by those fuel oil customers who normally pay within the
discount period? What is the total penalty paid by those that are delinquent over 30 days?
4. Currently, only 25% of the sales volume is paid by customers who are taking advantage of the discount, and 20% of the sales are over
30 days. Using these figures, how does that change your results from Exercise 3 above? Because your answers show that Rob is presently
making more money (at least he should), why should he be concerned about the current situation? What suggestions do you have?