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 figuring out this one.
To calculate how much can be saved by borrowing the funds to take advantage of the cash discount, we need to follow these steps:
Step 1: Calculate the amount of the cash discount
Since the terms are 3/15, n/45, it means that the customer can receive a 3% discount if payment is made within 15 days from the invoice date. So, the amount of the cash discount can be calculated by multiplying the order amount by the discount rate: Cash Discount = Order Amount * Discount Rate
Cash Discount = $230,000 * 3% = $6,900
Step 2: Calculate the amount that needs to be borrowed
To determine the amount that needs to be borrowed, we subtract the cash discount from the order amount: Amount to be Borrowed = Order Amount - Cash Discount
Amount to be Borrowed = $230,000 - $6,900 = $223,100
Step 3: Calculate the interest cost of borrowing for 30 days
To calculate the interest cost, we need to find the interest rate per day first. Since the interest is stated as 13% ordinary interest, we can divide the annual interest rate by the number of days in a year:
Interest Rate per Day = Annual Interest Rate / Number of Days in a Year
Number of Days in a Year = 365
Interest Rate per Day = 13% / 365 = 0.0356%
Next, we multiply the amount to be borrowed by the interest rate per day and then multiply it by the number of days (30) that the funds will be borrowed:
Interest Cost = Amount to be Borrowed * Interest Rate per Day * Number of Days
Interest Cost = $223,100 * 0.0356% * 30
Step 4: Calculate the savings by borrowing the funds for 30 days
To calculate the savings, we subtract the interest cost from the cash discount:
Savings = Cash Discount - Interest Cost
Savings = $6,900 - ( $223,100 * 0.0356% * 30 )
By following these steps, you can determine the amount that can be saved.