P15–6 Early payment discount decisions Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table. (Note: Assume a 365-day year.)SupplierCredit termsJ1/5 net 30 EOMK2/20 net 80 EOML1/15 net 60 EOMM3/10 net 90 EOMCalculate the approximate cost of giving up the early payment discount from each supplier.If the firm needs short-term funds, which are currently available from its commercial bank at 9%, and if each of the suppliers is viewed separately, which, if any, of the suppliers’ early payment discounts should the firm give up? Explain why.Now assume that the firm could stretch by 30 days its accounts payable (net period only) from supplier M. What impact, if any, would that have on your answer in part brelative to this supplier?

Here cost of giving up lower than bank rate be preferred

Answered: P15–6 Early payment discount decisions…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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P15–6 Early payment discount decisions Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following table. (Note: Assume a 365-day year.)

Supplier	Credit terms
J	1/5 net 30 EOM
K	2/20 net 80 EOM
L	1/15 net 60 EOM
M	3/10 net 90 EOM

Calculate the approximate cost of giving up the early payment discount from each supplier.
If the firm needs short-term funds, which are currently available from its commercial bank at 9%, and if each of the suppliers is viewed separately, which, if any, of the suppliers’ early payment discounts should the firm give up? Explain why.
Now assume that the firm could stretch by 30 days its accounts payable (net period only) from supplier M. What impact, if any, would that have on your answer in part brelative to this supplier?

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