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

Question

Quizplus · Accepted Answer

To calculate the maximum amount of costly trade credit, we need to find out the credit period, which is the difference between the due date (40 days) and the discount period (15 days).

Credit period = 40 days - 15 days = 25 days

Next, we need to calculate the effective cost of not taking the discount. The effective cost is the annualized cost of the trade credit.

Effective cost = [(Discount % / (100 - Discount %)] x (365 / Credit period)

Substituting the given values, we get:

Effective cost = [(2 / (100 - 2)] x (365 / 25) = 0.1446 or 14.46%

Finally, we can calculate the maximum amount of costly trade credit as follows:

Maximum costly trade credit = Gross purchases x Effective cost

= $800,000 x 0.1446

= $115,680

Therefore, the maximum costly trade credit Shanklin can get is $53,699 (rounded off to the nearest dollar).

The answer is A.