Question

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/19, net 60. Mr. Warner never takes the discount offered, but he pays his suppliers in 50 days rather than the 60 days allowed so that he is sure the payments are never late. What is Mr. Warner's cost of not taking the cash discount

Answer 1

35.92%

Step-by-step explanation:

The computation of cost of not taking the cash discount is shown below:-

Discount percentage ÷ (100 - Discount percentage) × (360 ÷ (Full Allowed Payment Days - Discount Days))

= 3% ÷ 97% × 360 ÷ (50 - 19)

= 3% ÷ 97% × 360 ÷ 31

= 0.03093 × 11.61290

= 0.359187

= 35.92%

Therefore for computing Mr. Warner's cost of not taking the cash discount we applied the above formula.