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Your company’s annual material purchases are $6,000,000 (evenly spread out over 365 days). Currently your accounts...

Your company’s annual material purchases are $6,000,000 (evenly spread out over 365 days). Currently your accounts payable clerk sends in each payment after 20 days. However you have determined that payments sent out after 30 days will stay make it in time to your supplier to meet the 35 net day payment terms. Your company’s annual cost of borrowing is 10%. How much money can you save by sending payments after 30 days?
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Answer #1

We are asked to find the savings in cost of borrowings if payment is made in 30 days instead of present practice of 20 days. I,e savings of 10 days holding of payment.

Annual Sales is 6,000,000. Hence daily sales = 16,438.35( 6,000,000 / 365 days)

For almost Daily Payment of 16,438 we get an additional 10 days to make the payment.

i.e Savings will be cost for 10 days on daily payment @ 10% pa

Total Savings= 16438.35 * 10% *10/365

= $45

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