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.)
I'm having trouble solving this one. Can anyone point me in the right direction?
To calculate the amount that can be saved by borrowing the funds and taking advantage of the cash discount, you need to consider the terms and calculate the net amount due after the discount.
The terms of the order, 3/15, n/45, mean that the retailer (Suite Dreams) can enjoy a 3% cash discount if they pay within 15 days, and the full amount is due within 45 days.
Here's how you can calculate the net amount due after the cash discount:
1. Determine the cash discount: To calculate the cash discount, multiply the amount of the order ($230,000) by the cash discount rate (3% or 0.03).
Cash discount = $230,000 x 0.03 = $6,900
2. Determine the net amount due after the cash discount: Subtract the cash discount from the total order amount.
Net amount due = Total order amount - Cash discount
Net amount due = $230,000 - $6,900 = $223,100
Now, you need to calculate the interest expense for borrowing the funds for 30 days at a 13% annual interest rate:
3. Calculate the daily interest rate: Divide the annual interest rate by 365 (days in a year) to get the daily interest rate.
Daily interest rate = 13% / 365 = 0.0356%
4. Determine the interest expense for 30 days: Multiply the net amount due after the cash discount ($223,100) by the daily interest rate (0.000356) and then multiply it by 30 days.
Interest expense for 30 days = Net amount due x Daily interest rate x Number of days
Interest expense for 30 days = $223,100 x 0.000356 x 30 = $23.785
Therefore, by borrowing the funds for 30 days and taking advantage of the cash discount, the total amount saved would be $23,785.