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 determine how much can be saved by borrowing the funds for 30 days to take advantage of the cash discount, you need to calculate the net amount due after the cash discount and compare it to the amount that would be borrowed at the interest rate.
Let's break down the given terms:
- Terms of 3/15, n/45 mean that a cash discount of 3% is offered if payment is made within 15 days. Otherwise, the full amount is due within 45 days.
- The order amounted to $230,000.
Here's how you can calculate the net amount due after the cash discount:
1. Calculate the cash discount:
Cash Discount = Order Amount x Discount Rate
Cash Discount = $230,000 x 0.03
Cash Discount = $6,900
2. Calculate the net amount due after the cash discount:
Net Amount Due = Order Amount - Cash Discount
Net Amount Due = $230,000 - $6,900
Net Amount Due = $223,100
So, the net amount due after the cash discount is $223,100.
Next, to determine how much can be saved by borrowing the funds for 30 days, you need to compare the cost of borrowing with the cash discount saved.
1. Calculate the interest cost for borrowing for 30 days:
Interest Cost = Net Amount Due x Interest Rate x (Days / 365)
Interest Cost = $223,100 x 0.13 x (30 / 365)
Interest Cost = $6,911.62
Therefore, the interest cost for borrowing the net amount due for 30 days is approximately $6,911.62.
Finally, calculate the savings by subtracting the interest cost from the cash discount:
Savings = Cash Discount - Interest Cost
Savings = $6,900 - $6,911.62
Savings = -$11.62
In this case, it appears that there would be a slight cost of approximately $11.62 to borrow the funds for 30 days to take advantage of the cash discount.