Question

Monument Health buys $400,000 of a particular item (at gross prices) from its major supplier, Cardinal Health, which offers Monument terms of 1/5, net 15. Currently, the hospital is paying the supplier the full amount due on Day 15, but it is considering taking the discount, paying on Day 5 and replacing the trade credit with a bank loan that has a 12 percent rate. Assume 360 days per year.
1. What is the amount of free trade credit that the organization obtains from Cardinal Health? Format is $xx,xxx.xx
2. What is the total amount of trade credit offered by Cardinal? Format is $xx,xxx.xx
3. What is the approximate annual cost of the costly trade credit? Format is xx.xx%
4. Should the organization replace a portion of the trade credit with the bank loan? Format is Yes or No
5. If the bank loan is used, how much of the trade credit should be replaced?

Answer 1

1. The amount of the free trade credit that Monument Health obtains from Cardinal Health is $400,000.00.

2. The total amount of trade credit offered by Cardinal is $404,000.00.

3. The approximate annual cost of the costly trade credit is 72%.

4. No. Monument Health should not replace a portion of the trade credit with a bank loan.

5. If the bank loan is used, the trade credit should be replaced by $133,333.00.

What is trade credit?

Trade credit is a business arrangement that allows the buyer to buy goods in exchange for later payment.

Giving trade credit is costly to the seller but profitable to the buyer, especially with the offer of cash discounts.

Data and Calculations:

Gross prices = $400,000

Terms of trade = 1/5, net 15

Bank loan = $400,000

Loan interest rate = 12%

Days per year = 360 days

Cost of Trade Credit for 5 days = $4,000.00 ($400,000 x 1%)

Annualized cost = 72% (1%/5 x 360)

Cost of bank loan for 10 days = $1,333.33 ($400,000 x 12% x 10/360)

Learn more about trade credit and cash discounts at brainly.com/question/14883253

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