Snowhite plc has taken delivery of 50,000 units of Dwarf moulds for use in its garden ornament business. The supplier has sent an invoice which states the following:
'£50,000 is payable if the purchaser pays in 30 days. However, if payment is within 10 days, a 1 per cent discount may be applied.'
Snowhite has an unused overdraft facility in place, on which interest is payable at 12 per cent annual percentage rate on the daily outstanding balance. If Snowhite paid after 10 days the overdraft facility would have to be used for the entire payment.
a. Calculate whether to pay on the 30th day or on the 10th day, on the basis of the information provided.
b. Despite the 30-day credit limit on the contract Snowhite is aware that it is quite normal in this industry to pay on the 60th day without incurring a penalty legally, financially or in terms of reputation and credit standing. How does this alter your analysis?