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  • 1.  PART 2:Calculating the Net Annual savings.

    Posted 05-08-2021 03:18 AM
    Hello folks,

    Can somebody help me the understand the below question.


    XYZ CO. 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 XYZ CO. has been paying on the net due date and foregoing the discount. A local bank offered XYZ CO. a loan at an interest rate of 10%. What will be the net annual savings to XYZ CO. 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.

    ANSWER: B
    Savings from trade discount = 1% x $25,000 x 24 = $6,000
    Interest to bank = 10% x $24,750 / 12 x 24 = $4,950
    Net savings = $6,000 – $4,950 = $1,050

    I don't understand why 24 is multiplied? 

    Thanks in Advance.

    Regards,
    Prajnya Shetty


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    Prajnya Shetty
    GL Executive in XPO Logistics
    India.
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  • 2.  RE: PART 2:Calculating the Net Annual savings.

    Posted 05-09-2021 01:14 AM

    The question described that the buyer receive the merchandise on 15th / 30th every month. 

    it means the buyer should pay the supplier 25,000 * 2 = 50,000 per months. Thus, it should be 24 times when you calculate the saving. 

    Hope it clarifies


    Original Message


  • 3.  RE: PART 2:Calculating the Net Annual savings.

    Posted 05-09-2021 01:50 AM
    Hi,

    The Co. receives the supplies twice in a month I,e from 0-15 days and 15-30 days in a month. On each supply worth $25000 the Co. is getting a discount of 1%. 
    (1/15 net 45) Given terms.

    So if the Co. pays within the given discount days i.e 15 days it can save twice in a month. So annually its saving will be ;
    i.e $25000X1%X2X12=$6000

    & to pay the  bank loan interest of 10% p.a offered the company will borrow the funds twice;
    $24750X10%X2=$4950

    So the Net  savings = $6000-$4950=$1050

    Hope this clears.

    Thanks & regards,
    Shashi





    Original Message


  • 4.  RE: PART 2:Calculating the Net Annual savings.

    Posted 05-10-2021 01:44 PM
    Hi Prajnya,

    If XYZ Co. choses the option of availing cash discount, it is advancing it's payment by 1 month (45 days - 15 days).
    This means each tranche of $ 24,750 needs financing for 1 month @ 10% p.a.
    We have 24 such tranches​.

    Hence, Interest to bank = 10% x $24,750 x (1/ 12) x 24 = $4,950

    Regards,
    Chirag Patel

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    Chirag Patel
    None
    Pune MH
    India
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    Original Message