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 the amount that can be saved by borrowing the funds for 30 days to take advantage of the cash discount, we need to follow the steps below:
Step 1: Determine the amount of the cash discount.
The terms "3/15, n/45" indicate that a 3% cash discount can be taken if payment is made within 15 days.
Cash Discount = Order Amount * Cash Discount Rate
Cash Discount = $230,000 * 0.03
Cash Discount = $6,900
Step 2: Calculate the net amount due after taking the cash discount.
Net Amount Due = Order Amount - Cash Discount
Net Amount Due = $230,000 - $6,900
Net Amount Due = $223,100
Step 3: Calculate the interest on borrowing the net amount due.
Interest = Principal * Interest Rate * Time
Interest = $223,100 * 0.13 * (30/365)
Step 4: Calculate the total amount due after 30 days, including interest.
Total Amount Due = Net Amount Due + Interest
Total Amount Due = $223,100 + (Interest calculated in Step 3)
By following these steps, you can determine the amount that can be saved by borrowing the funds for 30 days to take advantage of the cash discount.