SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical.

1) Refer to Instruction 22.1. What is the amount of money SureDrip will save on accounts payable if they accept the discount?

A) $400,000

B) $8,000

C) $33,333

D) $20,000

Answer: B

2) Refer to Instruction 22.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?

A) 7.3%

B) 9.5%

C) 10.4%

D) 22.9%

Answer: D

3) Refer to Instruction 22.1. Should SureDrip take the discount offered by Sun Chemical?

A) Yes, SureDrip will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days.

B) No, SureDrip will not have to pay any interest if they just pay in 45 days.

C) Yes, SureDrip's short term borrowing rate of 9.6% is less than Sun's offered cost of carry of 22.9%.

D) No, it costs SureDrip 22.9% to accept the discount and they are better off paying the full amount in 45 days.

Answer: C

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