Bond Company budgets the following purchases of direct materials for the first quarter of the year:...
Bond Company budgets the following purchases of direct materials for the first quarter of the year:
| January | February | March | ||||
| Budgeted purchases | $ | 150,000 | $ | 120,000 | $ | 90,000 |
All purchases of direct materials are made on credit. On average, the company pays 80% of its purchases in the month of sales and the remainder in the following month.
Required:
1. For the months of February and March, what are the budgeted cash payments for purchases of direct materials under the assumption that there is no (cash) discount for early payment?
2. For the months of February and March, what are the budgeted cash payments for purchases of direct materials under the assumption that the purchase terms are 2/15, net 30? The company’s policy is to take advantage of all cash discounts for early payment.
3a. Using the purchase terms in Requirement 2, calculate the opportunity cost if Bond does not decide to take advantage of the early payment discount.
3b. Can it be considered good economic policy to take advantage of early payment discounts?
Homework Answers
1.
| February | March | |
| Budgeted Cash Payments | $126,000 | $96,000 |
| Working: | ||
| 80% in the same month | 96000 | 72000 |
| Remainder 20% in next month | ||
| January Purchase | 30000 | |
| February Purchase | 24000 |
2.
| February | March | |
| Budgeted Cash Payments | $ 124,080.00 | $ 94,560.00 |
| Working: | ||
| 80% in the same month | 94080 | 70560 |
| =120000*80%*98% | =90000*80%*98% | |
| Remainder 20% in next month | ||
| January Purchase | 30000 | |
| February Purchase | 24000 |
3.
| Opportunity Cost | $ 3,360.00 |
| (126000+96000-124080-94560) | |
| Opportunity Cost % | 1.54% |
| (3360/218640)*100 |
4. Yes
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Bond Company budgets the following purchases of direct materials for the first quarter of the year:...
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