Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 48

Cash Disbursements Budget Bond Company budgets the following purchases of direct materials for the first quarter of the year:

All purchases of direct materials are made on credit. On average, the company pays 80% of its purchases in the month of sales and the remainder in the following month.
Required
1. For the months of February and March, what are the budgeted 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 budgeted cash payments for purchases of direct materials under the assumption that the purchase terms are 2/15, 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.