CMA Study Group

Dear friends,

Can anyone resolve the following question?

Dexter Products receives $25,000 worth of merchandise from its major supplier on the 15th and 30th of each month. The goods are sold on terms of 1/15, net 45, and Dexter has been paying on the net due date and forgoing the discount. A local bank offered Dexter a loan at an interest rate of 10%. What will be the net annual savings to Dexter if it borrows from the bank and utilizes the funds to take  advantage of the trade discount?

a. $525

b. $1,050

c. $1,575

d. $2,250

The net annual savings would be the amount of the discounts taken, less the interest on the bank loan. Discounts taken = (0.01)($25,000)(2 times per month)(12 months) = $6,000 Interest on the bank loan = ($25,000)(1 - 0.01)(4,750)(0.10)(30/360)(24 loans) = $4,950, since each loan would have to cover the 30 days between the 15 day discount period and the 45th day due date. Net savings = $6,000 – $4,950 = $1,050

 

(25000×1%×2×12 )  - ( 25000×10% /12  ×2×12   ×99% ) = 1050

 

my question:why by multiply 99% ?

 

because he borrowed the net amount to be paid to the vendor = the basic amount * net % 

 

got it ? 

Because Dextor will get 1% discount on $25,000, it needs to borrow 99% (100-1) of the invoice amount of $25,000.