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.)
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 determine how much Suite Dreams can save by borrowing the funds for 30 days to take advantage of the cash discount, we need to calculate the net amount due after the cash discount and compare it to the amount Suite Dreams would need to borrow.
First, let's break down the terms of 3/15, n/45:
- The first number (3) represents the cash discount percentage, which is 3%.
- The second number (15) represents the number of days within which the customer can take the cash discount.
- The letter 'n' represents the net due date, which is the number of days within which the full payment must be made to the manufacturer.
The order amounted to $230,000, so we need to calculate the cash discount and the net amount due.
1. Calculate the cash discount:
Cash discount = Order amount × Cash discount percentage
Cash discount = $230,000 × 0.03
Cash discount = $6,900
2. Calculate the net amount due:
Net amount due = Order amount - Cash discount
Net amount due = $230,000 - $6,900
Net amount due = $223,100
Therefore, the net amount due after the cash discount is $223,100.
Next, we need to calculate the interest cost of borrowing that amount for 30 days at an interest rate of 13% per year (or approximately 1.083% per month).
Interest cost = Net amount due × Monthly interest rate × Number of months
Interest cost = $223,100 × 0.01083 × 1
Interest cost = $2,415.91
By borrowing the funds for 30 days to take advantage of the cash discount, Suite Dreams can save approximately $2,415.91.
Note: If the 'n' in the terms of 3/15, n/45 represents the net due date, we assume that Suite Dreams pays the net amount due on the net due date, which is 45 days. The interest cost calculation is based on a 30-day borrowing period to align with the cash discount calculation.