Calculation of cost of not taking cash discount
a)2/14, net 45 it means the bussiness wil pay full amount of invoice i.e 2% more than its needs to, if it wait for the full 30 days period to elapse before making payments instead of paying within 10 day period,so there is cost to bussiness of not taking the discount.
The formula is= The percentage of discount/(100-percentage of discount)×( 360/number of days between early payment date and normal due date)×100
The percentage of discount=2
number of days between early payment date and normal due date= 45-14=31
cost of not taking discount=2/(100-2)×360/31
=(2/98)×(360/31)×100=23.69%
(B)2/19,net 60
The formula is= The percentage of discount/(100-percentage of discount)× (360/number of days between early payment date and normal due date)×100
The percentage of discount=2
number of days between early payment date and normal due date= 60-19=41
cost of not taking discount=2/(100-2)×360/41
=(2/98)×(360/41)×100=17.91
C)4/19 ,net 45
The formula is= The percentage of discount/(100-percentage of discount)× 360/number of days between early payment date and normal due date×100
The percentage of discount=4
number of days between early payment date and normal due date= 45-19=26
cost of not taking discount=4/(100-4)×360/26
=(4/96)×(360/26)×100=57.69%
D)3/13 net 130
The formula is= The percentage of discount/(100-percentage of discount)× 360/number of days between early payment date and normal due date×100
The percentage of discount=3
number of days between early payment date and normal due date= 130-13=117
cost of not taking discount=3/(100-3)×360/117
=(3/97)×(360/117)×100=9.56%
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