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PROBLEM 6 Langley Clinics, Inc., buys $400,000 in medical supplies a year (at gross prices) from its major supplier, Consolidated Services, which offers Langley terms
PROBLEM 6 | |||||||||
Langley Clinics, Inc., buys $400,000 in medical supplies a year (at gross prices) from its major supplier, | |||||||||
Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the | |||||||||
supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and | |||||||||
replacing the trade credit with a bank loan that has a 10 percent annual cost. | |||||||||
a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume | |||||||||
360 days per year throughout this problem.) | |||||||||
b. What is the amount of costly trade credit? | |||||||||
c. What is the approximate annual percentage cost of the costly trade credit? | |||||||||
d. Should Langley replace its trade credit with the bank loan? Explain your answer. | |||||||||
e. If the bank loan is used, how much of the trade credit should be replaced? | |||||||||
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