Skip to contentSkip to search
Sign inRegister

Ask the Tutor ACCA FM

discount for early payment offered by SUPPLIERS?

Lliz7715y ago
I understand the equation is the same as that for receivables but i dont get what the decision rule is.

For receivables, since the effective rate is the cost of giving the discount, it should only be offered if its cheaper than financing through the overdraft.

So how is it for payables?
i'm really confused...
Former userFormer user15y ago#1
It is worthwhile accepting the discount from a supplier If the cost of financing the discount (i.e the overdraft rate x by the reduction in credit period allowed) is LESS THAN the amount of the discount.

Example
A supplier offers a discount of 2% on an invoice of $7,500 if the invoice is paid within one month instead of the three months normally taken to pay. Assume, the O/D rate is 10%. Is it financially worthwhile to accept the discount and pay early?

Answer:
Discount offered saves 2% of $7,500 = $150
Financed by overdraft for the extra 2 months
Cost = 10% x 2/12 x $7,500 = $125

Net Saving = $25 ........DECISION: It is worth accepting the discount

Hope this has helped

Regards, Kevin Kelly
Sign into reply to this topic.