Mason Products, a large building-supply company, has four possible suppliers, each offering different credit terms. Otherwise, their
Question:
Mason Products, a large building-supply company, has four possible suppliers, each offering different credit terms. Otherwise, their products and services are identical. Table 15.1 presents the credit terms offered by suppliers A, B, C, and D and the cost of giving up the cash discounts in each transaction. The approximation method of calculating the cost of giving up a cash discount (Equation 15.2) has been used. The cost of giving up the cash discount from supplier A is 36%; from supplier B, 8%; from supplier C, 21.6%; and from supplier D, 28.8%. If the firm needs short-term funds, which it can borrow from its bank at an interest rate of 13%, and if each of the suppliers is viewed separately, which (if any) of the suppliers’ cash discounts will the firm give up? In dealing with supplier A, the firm takes the cash discount, because the cost of giving it up is 36%, and then borrows the funds it requires from its bank at 13% interest. With supplier B, the firm would do better to give up the cash discount, because the cost of this action is less than the cost of borrowing money from the bank (8% versus 13%). With either supplier C or supplier D, the firm should take the cash discount, because in both cases the cost of giving up the discount is greater than the 13% cost of borrowing from the bank.
Equation 15.2
TABLE 15.1 | ||
Cash Discounts and Associated Costs for Mason Products | ||
|
| Approximate |
|
| cost of giving up |
Supplier | Credit terms | a cash discount |
A | 2/10 net 30 EOM | 36.0% |
B | 1/10 net 55 EOM | 8.0 |
C | 3/20 net 70 EOM | 21.6 |
D | 4/10 net 60 EOM | 28.8 |
Expert Answer:
Based on the information given in table 151the firm should give up the cash discount from supplier B... View the full answer
