If Jonas Movers Ltd. chooses to forego the 3% discount offered by its corrugated box supplier if the invoice is paid with 15 days in favour of paying in 50 days, using the approximation formula, what will the oversight cost Jonas in terms of an annualized rate?

Question

Quizplus · Accepted Answer

Using the approximation formula:

Oversight cost = (Discount % / (100% - Discount %)) x (360 / (Payment days - Discount days))

Plugging in the given values, we get:

Oversight cost = (3% / (100% - 3%)) x (360 / (50 - 15))
                  = 0.0311 or 3.11%

To annualize this rate, we multiply by 365/35= 10.43.

Annualized oversight cost= 3.11% x 10.43= 32.44% or approximately 31.3%

Therefore, the oversight cost of this decision would be 31.3%, so the best choice is option C.