- February 27, 2021 at 7:54 pm #612028adarsh1997Participant
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TNG Co expects annual demand for product X to be 255,380 units. Product X has a selling price of $19 per unit and is purchased for $11 per unit from a supplier; MKR Co. TNG places an order for 50,000 units of product X at regular intervals throughout the year. As the demand for product X is to some degree uncertain, TNG maintains a safety (buffer) inventory of product X which is sufficient to meet demand for 28 working days. The cost of placing an order is $25, and the storage cost for Product X is 10 cents per unit per year. TNG normally pays trade suppliers after 60 days, but MKR has offered a discount of 1% for a cash settlement within 20 days.
-Determine whether the discount offered by the supplier is financially acceptable to TNG Co.
1. The answer is as follows:
Annual credit purchases (255,380 x 11) 2,809,180 0.5
Current payables (2,809,180 x 60/365) 461,783 0.5
Payables if discount is taken (2,809,180 x 20/365) 153,928 0.5
Reduction in payables (461,783 – 153,928) 307,855 0.5
Finance cost increase (307,855 x 0·08) 24,628 0.5
Discount gained (2,809,180 x 0·01) 28,091 0.5
Net benefit of taking discount (28,091 – 24,628) 3,463
2. My issue is that why the discount was not used to calculate “Payables if discount is taken”
– The same requirement was asked in another question(Plot CO Dec 13) and discount used to calculate the revised the trade payables.
ThanksFebruary 28, 2021 at 9:21 am #612073John MoffatKeymaster
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There is no need to type out past exam questions in full – I have all past exam questions so you only have to give the name and the date of the exam.
As I explain in my lectures on this, the examiner is not consistent on this – sometimes he brings in the discount and sometimes he does not. However he has said that either will get the full marks (and it never makes a big difference anyway).
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