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1 July, 18:39

Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i. e., purchases before taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier's credit terms

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  1. 1 July, 19:49
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    The answer is $53,699

    Explanation:

    Discount = 2%

    Discount days = 15 days

    Net days = 40 days

    Gross purchase is $800,000 per year

    Discount on the purchase is $16,000 (2% of $800,000)

    Therefore net purchase is $784,000 ($800,000 - $16,000).

    Net per day is:

    Net purchase : 365 days

    $784,000 : 365 days

    = $2,147.95

    Total trade credit = Net per day x Net days

    $2,147.95 x 40 days = $85,918

    Free credit = Net per day * Discount days

    =$2,147.95 x 15 = $32,219

    Therefore, Costly trade credit = Total credit - Free credit

    $85,918 - $32,219

    = $53,699
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