. You are the accountant for Suite Dreams, a retail furniture store. Recently, an order of sofas and chairs was received from the manufacturer with terms of 3/15, n/45. The order amounted to $230,000, and Suite Dreams can borrow money at 13% ordinary interest.
How much can be saved by borrowing the funds for 30 days to take advantage of the cash discount? (Remember, Suite Dreams must borrow only the net amount due after the cash discount is taken
To calculate how much can be saved by borrowing the funds for 30 days to take advantage of the cash discount, we need to first determine the cash discount amount.
The terms 3/15, n/45 mean that the manufacturer offers a 3% cash discount if the payment is made within 15 days, otherwise the full amount is due within 45 days.
Step 1: Calculate the cash discount amount:
Cash discount = Order amount * (Discount rate/100)
Cash discount = $230,000 * (3/100) = $6,900
Step 2: Calculate the net amount due after the cash discount:
Net amount due = Order amount - Cash discount
Net amount due = $230,000 - $6,900 = $223,100
Step 3: Calculate the interest on the loan for 30 days:
Interest = Principal * Rate * Time
Interest = $223,100 * (13/100) * (30/365) = $4,918.77 (rounded to the nearest cent)
By borrowing the funds for 30 days and taking advantage of the cash discount, Suite Dreams can save approximately $4,918.77 in interest expenses.