Cost of trade credit: Senter Company sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit?

Question

Quizplus · Accepted Answer

The terms 2/10 EOM mean that the buyer can take a 2% discount if they pay within 10 days, otherwise, they must pay the full amount within 30 days. To calculate the implicit cost of the trade credit, first, find the cost of giving up the 2% discount: 2% / (1 - 2%) = 2.04%. Then, find the cost of the credit period: 365 / (30 - 10) * (1 - 2%) = 44.59%. Add the two costs together to get the implicit cost of the trade credit: 2.04% + 44.59% = 46.63%. Rounded to the nearest hundredth, the answer is 44.59%. Therefore, the best choice would be C.

Cost of Trade Credit: Senter Company Sells Its Goods with Terms