Question

Columbia Hospital buys and average of $20,250,000 in medical supplies each year (at gross prices) from its major supplier, Medical Supplier of America which offers Columbia Hospital terms of 4/15, net 45. If Columbia Hospital's managers decide not to take the discount, what is Columbia Hospital's costly trade credit from Medical Suppliers of America?

Answer 1

Columbia Hospital's costly trade credit for not taking advantage of the early payment discount from Medical Supplier of America is approximately 50.69% of $20,250,000 yearly supplies expense.

Step-by-step explanation:

The question pertains to the cost of trade credit that Columbia Hospital incurs by not taking advantage of the early payment discount offered by its supplier, Medical Suppliers of America. The terms given by the supplier are 4/15, net 45, which means the hospital can take a 4% discount if it pays within 15 days; otherwise, the full amount is due within 45 days. To calculate the costly trade credit, we'd use the formula for the annualized interest rate of not taking the discount: Annualized Interest Rate = (Discount Percent / (100 - Discount Percent)) * (365 / (Full Payment Due Date - Discount Period)) Substituting the values, we get: Annualized Interest Rate = (4 / (100 - 4)) * (365 / (45 - 15)) Annualized Interest Rate = (4 / 96) * (365 / 30) ≈ 0.0416667 * 12.1667 ≈ 0.5069 or 50.69% Therefore, by not taking the discount, Columbia Hospital's annualized cost of trade credit is approximately 50.69% of $20,250,000 in medical supplies.