This answer results from using 100% (or 1.00) in the denominator of the second part of the formula for calculating the cost of not taking a cash discount that is offered for early payment. The denominator should be 100% (or 1.00) minus the discount % (or the discount % in decimal form). The correct formula is: 360 × Discount % Total period for payment ? Period for discount payment 100% ? Discount %
The formula for the cost of not taking the discount is 360 × Discount % Total period for payment ? Period for discount payment 100% ? Discount % This answer results from using the number of days Dudley is allowed to take to pay (45 days) as the total period for payment in the formula. However, the problem says Dudley would pay the suppliers 5 days after the net due date. Since the net due date is 45 days, 5 days after it would be 50 days; so we must use 50 days in the formula as the total period for payment.
This is solved using the formula for the cost of not taking the discount, but it has a twist to it. The formula for the cost of not taking the discount is 360 × Discount % Total period for payment ? Period for discount payment 100% ? Discount % Instead of using the number of days Dudley is allowed to take to pay according to the terms (45 days) as the total period for payment, we must use the number of days the company would actually take to pay. The problem says Dudley would pay the suppliers 5 days after the net due date. Since the net due date is 45 days, we must use 50 days in the formula as the total period for payment. Inputting the information from the question into the formula, we get 18.4%, as follows: 360 × .02 50 ? 10 1.00 ? .02 = 9 × .020408 = .184 or 18.4%.
This answer results from using 30 days as the denominator of the first part of the formula for calculating the cost of not taking a cash discount that is offered for early payment. The denominator of the first part of the formula should be Total Period for Payment ? Period for Discount Payment. The correct formula is: 360 × Discount % Total period for payment ? Period for discount payment 100% ? Discount % However, instead of using the number of days Dudley is allowed to take to pay according to the terms (45 days) as the total period for payment, we must use the number of days the company would actually take to pay. The problem says Dudley would pay the suppliers 5 days after the net due date. Since the net due date is 45 days, we must use 50 days in the formula as the total period for payment. So the denominator needs to be 50 ? 10, or 40.
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