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August 23, 2014

August 23, 2014

Posted by **April** on Monday, February 28, 2011 at 12:07am.

Misuse and abuse of trade discounts infringe on fair trade laws and can cost companies stiff fines and legal fees. One way to avoid misuse is to estblish the same discount for everyone and give rebates based solely on volume. Image Manufacturing, In., uses this policy for equipment sales to companies that develop photographs. For example, one developing machine component, a special hinge, sells for about $3 to a company buying 15,000 pieces per month. In an effort to run more cost-efficient large jobs and capture market share, Image Manufacturing will give an incentive for higher volume. It offers a 5% rebate on orders of 20,000 pieces per month. or 17-18 cents apiece rebate for orders of at least 22,000 pieces per month. The increased volume needed for rebate is determined by market research that tells Image Manufacturing factors such as the volume a customer is capable of ordering per month, the volume and cost of the same part a customer currently buys from other suppliers. The rebate amount is determined by Image Manufacturing's profit margin and the company's ability to acquire sufficient raw materials to produce large volumes without raising production costs. In some industries this is called a bill-back because the buyer receives credit toward the next order rather than a rebate check.

1. Suppose Photo Magic orders 15,000 hinges per month form Image Manufacturing at $3 each, which is about half of what they buy each month from other suppliers. If they move 5,000 pieces per month from another company to Image Manufacturing, what will be their rebate on the total order? What will be the discounted cost per price? What calculations did you use the answers?

2. If Photo magic increases its order to 22,000 pieces per month and negotiates an 18 cent-per-piece trade discount, what will be the rebate? What is the percent of the discount? How did you get the answer?

3. If Photo Magic also receives a 1/2% cash discount (10 days, net 30), calculate the cash discount and total rebate on a 30,000-piece-per-month order, and then find the net price. The cash discount of 1/2% is allowed to be taken on total purchase before the rebate is applied. How did you calculate your answer?

4. Another company currently orders about 6,000 hinges per month from Image Manufacturing at $3 each. Image Manufacturing's marketing manager believes this company is capable of expanding its business to 8,000 pieces per month and recommends a rebate of 17 cents per piece if they so. Rounded to the nearest tenth, what is the rebate percentage? How did you calculate the formulas? Do you think this trade discount violates fair trade laws? Why and why not?

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