CHAPTER $5$: TRADE DISCOUNT

Introduction:

This case study focuses on ABC Company, a firm that purchases inventory items from a supplier known as Supplier$-$X$.$ Supplier$-$X offers a discount policy of $\frac{3}{10},\frac{n}{30},$ which means a $3\%$ discount is available if the company pays within $10$ days, but the net payment is due within $30$ days. However, ABC Company has never taken advantage of this discount because they consistently pay on the $30$th day, citing low liquidity as the primary reason. The new Chief Financial Officer $($CFO$)$ at ABC Company has proposed taking a loan from a local bank at an interest rate of $12\%$ to enable the company to pay Supplier$-$X on the $10$ th day and benefit from the discount. However, the CEO rejected this proposal, arguing that paying a $12\%$ interest rate to secure a $3\%$ discount would result in additional expenses.

$($a$)$ Current Payment Policy:

Under the current payment policy, ABC Company pays Supplier$-$X on the $30$th day, the last day of the credit period. This means they do not take advantage of the $3\%$ discount offered by Supplier$-$X$.$

$($b$)$ Proposed Payment Policy.

The proposed payment policy involves taking a loan from a local bank at an interest rate of $12\%$ to enable ABC Company to pay Supplier$-$X on the $10$th day and secure the $3$

Objective:

The objective of this case study is to demonstrate the feasibility and value of the CFO's proposal to the CEO. This will be accomplished by analyzing the current cost under the existing payment policy and comparing it to the proposed policy, ultimately showcasing the potential savings. The proposal that you will submit must include three sections:

The analysis section

The conclusion section

The recommendation section

The Analysis Section:

Within this section, students must delve into a comprehensive analysis to shed light on the financial aspects of ABC Company's current and proposed payment policies. By examining the costs associated with each approach, students must provide a clear understanding of the potential benefits and drawbacks, ultimately guiding the decision$-$making process. Through a meticulous examination of the data, students will present a compelling case that unveils the financial feasibility and implications of both options.

The Conclusion Section

In the concluding section of the proposal, present a clear and concise summary of the findings. Highlight the potential value of adopting the proposed payment policy, showcasing the net savings achieved by taking advantage of the Supplier$-$X discount and comparing it to the cost of the loan.

The Recommendation Section

Based on the analysis presented, recommend whether ABC Company should proceed with the proposed payment policy or maintain the current policy. Provide a rationale for your recommendation, emphasizing the financial benefits and feasibility of the proposed approach.

$1$