Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i. e., purchases before taking off the discount) are $800,000 per year. What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier's credit terms

The answer is $53,699

Explanation:

Discount = 2%

Discount days = 15 days

Net days = 40 days

Gross purchase is $800,000 per year

Discount on the purchase is $16,000 (2% of $800,000)

Therefore net purchase is $784,000 ($800,000 - $16,000).

Net per day is:

Net purchase : 365 days

$784,000 : 365 days

= $2,147.95

Total trade credit = Net per day x Net days

$2,147.95 x 40 days = $85,918

Free credit = Net per day * Discount days

=$2,147.95 x 15 = $32,219

Therefore, Costly trade credit = Total credit - Free credit

$85,918 - $32,219

= $53,699