The Ajax Company budgets the following purchases of direct materials for the first quarter of the year:

                                                                    January       February        March

             Budgeted Purchases                  $100,000     $120,000         $110,000

All purchases of direct materials are made on credit. On average, the company pays 75 percent of its purchases in the month of sales, and the remainder in the following month.

 

	January	February	March
Budget Purchases	$100,000	$120,000	$110,000
Percentage paid during month of sale		75%
Percentage discount for early payment		2%
Extra days allowed if discount is not taken (i.e., under 2/10, n/30)		20

Required

1. For the months of February and March, what are the estimated cash payments for purchases of direct materials under the assumption that there is no (cash) discount for early payment?

2. For the months of February and March, what are the estimated cash payments for purchases of direct material under the assumption that the purchase terms are 2/10, net 30? The company's policy is to take advantage of all cash discounts for early payment.

3. Provide an economic argument as to why it is good (economic) policy to take advantage of early payment discounts, as in (2)above.