Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 per year.What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Question

Quizplus · Accepted Answer

The correct answer is A.The maximum dollar amount of costly trade credit the firm could get is $53,699. This is calculated as follows:Gross purchases = $800,000Discount period = 15 daysNet period = 40 daysDays in a year = 365 daysAverage payment period = (Discount period + Net period) / 2= (15 days + 40 days) / 2= 27.5 daysCostly trade credit = Gross purchases * (Average payment period / Days in a year) * Discount rate= $800,000 * (27.5 days / 365 days) * 2%= $53,699

Fairweather Corporation Purchases Merchandise on Terms of 2/15, Net 40