Q3. Langley Clinics, Inc., buys $400,000 in medical supplies each year (at gross prices) from its major supplier, Consolidated Supplies, 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 costly trade credit with a bank loan that has a 10 percent annual cost. Assume 360 days per year.
a. What is the amount of free trade credit that Langley obtains from Consolidated Supplies?
Supplies per year (gross)
Discount rate
Supplies per year (net)
Daily supply cost (net)
Days of free trade credit
Days of costly trade credit
Free Trade Credit
b. What is the amount of costly trade credit?
Days of costly trade credit
Costly Trade Credit
c. What is the approximate annual cost of the costly trade credit?
Discount lost
Costly Trade Credit
% cost
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?