Question
Cash Disbursements Budget Bond Company budgets the following purchases of direct mate- rials for the first quarter of the year: January February March Budgeted purchases
Cash Disbursements Budget Bond Company budgets the following purchases of direct mate- rials 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 estimated 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 estimated cash payments for purchases of direct materials under the assumption that the purchase terms are 2/15, net 30? The companys policy is to take advantage of all cash discounts for early payment. 3. Provide an economic argument as to why it is good (economic) policy to take advantage of early payment discounts, as in (2) above.
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