Question

3. A firm purchases merchandise on terms of 2/15, net 40 days. It does not take discounts, and it typically pays on time, 40 days after the invoice date. Net purchases amount to €784,000 per year. Assume a 365-day year, and note that purchases are net of discounts. What are the amounts of Free trade credit and Costly trade credit the firm receives during the year?

Answer 1

Net purchases per day = 784/365 =	$               2,148
Total trade credit = Net days*Net purchases per day = 2148*40 =	$             85,920
Free credit*Net purchases per day = 2148*15 =	$             32,220
Costly credit = Total credit-Free credit =	$             53,700