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Chapter 6: Problem 19

A retailer is considering the purchase of 100 units of a specific item from either of two suppliers. Their offers are as follows: A: \(\$ 200\) a unit, total of \(\$ 20,000,2 / 10, n / 30\), no charge for freight. B: \(\$ 195\) a unit, total of \(\$ 19,500,1 / 10, \mathrm{n} / 30\), plus freight of \(\$ 400\). Which of the two offers, A or B, yields the lower price?

Short Answer

Expert verified
Supplier A's offer results in a lower cost at $19,600.

Step by step solution

01

Calculate Cost from Supplier A

Supplier A offers each unit at \(200, totaling \)20,000 for 100 units. The terms are \(2 / 10, n / 30\), implying a 2% discount is available if paid within 10 days. Calculate the total cost with the discount: \[ \text{Discount} = 0.02 \times 20,000 = 400 \\text{Discounted Total} = 20,000 - 400 = 19,600 \]Since there are no additional freight charges, the overall cost from Supplier A with the discount is $19,600.
02

Calculate Cost from Supplier B

Supplier B offers each unit at \(195, with the total for 100 units being \)19,500. The terms are \(1 / 10, n / 30\), indicating a 1% discount available if paid within 10 days, plus \(400 freight. Calculate the total cost including the discount and freight:\[ \text{Discount} = 0.01 \times 19,500 = 195 \\text{Discounted Total} = 19,500 - 195 = 19,305 \\text{Total Cost including Freight} = 19,305 + 400 = 19,705 \]Adding the freight charges back into the discounted total, the overall cost from Supplier B is \)19,705.
03

Compare the Total Costs

After calculating the total costs, compare the costs of both suppliers: Supplier A offers $19,600 while Supplier B offers $19,705. Thus, the lower cost offer is from Supplier A.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Supplier Comparison
When selecting the best supplier for a purchase, comparing suppliers based on their total offering is crucial. This comparison includes analyzing various factors beyond just the unit price. It's about understanding which supplier delivers the optimal balance of cost and benefits. Key points include:
  • Unit Price: This is the initial cost per item. Supplier A offers each unit at $200, while Supplier B's price is $195 per unit.
  • Additional Costs: Consider any extra charges like freight. Supplier B adds $400 as a freight charge, while Supplier A includes no additional freight costs.
  • Discount Terms: Evaluate the discount opportunities, as they can significantly affect the final price. Supplier A offers a 2% discount, whereas Supplier B provides a 1% discount.
These factors combined influence the total purchase cost and should be meticulously compared to choose the supplier that offers the best overall value. In this scenario, Supplier A turns out more economical after factoring in discounts and the absence of freight costs.
Discount Calculation
Discount terms play a vital role in cost analysis as they can significantly alter the final amount payable for a purchase. Understanding how discounts work is essential for cost efficiency.
  • Identify Discount Rate: Each supplier offers a specific discount based on early payment. Supplier A provides a 2% discount if paid within 10 days, while Supplier B offers a 1% discount.
  • Calculate the Discount: For Supplier A, the discount is calculated as 0.02 (2%) times the total of $20,000, equating to a $400 saving. In contrast, Supplier B's discount is 0.01 (1%) of $19,500, which is $195.
  • Apply the Discount: Subtract the discount from the original price to find the discounted total. Supplier A's adjusted price is $19,600, whereas Supplier B's is $19,305 after applying their respective discounts.
This understanding enables businesses to better assess offers and ensure they leverage early payment benefits to minimize their costs.
Freight Charges
Freight charges can significantly affect the overall cost from a supplier, impacting the final decision on which supplier to choose. It's important to understand how they are applied and incorporated into the total price.
  • Definition: Freight charges are the costs associated with transporting goods from the supplier to the purchaser.
  • Assessment: Supplier B includes a $400 freight charge, which should be added to their discounted total of $19,305, making the total $19,705.
  • Comparison Factor: Evaluate if the inclusion of freight charges justifies the overall package cost. Since Supplier A does not include any freight charges, it affects the total comparison against Supplier B.
Understanding how freight charges are applied is crucial in evaluating the total supplier cost, affecting purchase decisions and overall business budgeting.
Payment Terms
Payment terms can have significant financial implications for businesses. These terms define the period within which payments should be made, and can include discounts for early payments. It's essential to comprehend them fully to maximize financial benefits.
  • Structure: Payment terms usually denote two primary conditions: the discount and the net period. For Supplier A, the terms "2/10, n/30" mean a 2% discount is available if paying within 10 days, with the full amount due in 30 days.
  • Effectiveness: By adhering to the early payment discounts, businesses can save considerably, reducing the overall purchase cost.
  • Strategic Planning: Businesses must align their cash flow management to benefit from such discounts, potentially improving their profitability.
Thoroughly understanding and managing payment terms can thus be a strategic advantage, impacting overall financial health positively.

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Most popular questions from this chapter

Versailles Co., a women's clothing store, purchased \(\$ 18,000\) of merchandise from a supplier on account, terms FOB destination, \(2 / 10, \mathrm{n} / 30\). Versailles Co. returned \(\$ 3,000\) of the merchandise, receiving a credit memo, and then paid the amount due within the discount period. Journalize Versailles Co.'s entries to record (a) the purchase, (b) the merchandise return, and (c) the payment.

The following data were extracted from the accounting records of Wedgeforth Company for the year ended November 30, 2010: \(\begin{array}{lr}\text { Merchandise imventory, December } 1,2009 & \$ 210,000 \\ \text { Merchandise imventory, November } 30,2010 & 185,000 \\\ \text { Purchases } & 1,400,000 \\ \text { Purchases returns and allowances } & 20,000 \\ \text { Purchases discounts } & 18,500 \\ \text { Sales } & 2,250,000 \\ \text { Freight in } & 14,100\end{array}\) a. Prepare the cost of merchandise sold section of the income statement for the year ended November 30,2010 , using the periodic inventory system. b. Determine the gross profit to be reported on the income statement for the year ended November 30, \(2010 .\)

On March 31, 2010, the balances of the accounts appearing in the ledger of El Dorado Furnishings Company, a furniture wholesaler, are as follows: \(\begin{array}{lrlr}\text { Administrative Expenses } & \$ 250,000 & \text { Ricardo Cepeda, Capital } & \$ 1,137,600 \\ \text { Building } & 1,025,000 & \text { Ricardo Cepeda, Drawing } & 50,000 \\ \text { Cash } & 97,000 & \text { Salaries Payable } & 6,000 \\ \text { Cost of Merchandise Sold } & 1,400,000 & \text { Sales } & 2,550,000 \\ \text { Interest Expense } & 15,000 & \text { Sales Discounts } & 40,000 \\ \text { Merchandise Inventory } & 260,000 & \text { Sales Retums and Allowances } & 160,000 \\ \text { Notes Payable } & 59,000 & \text { Selling Expenses } & 410,000 \\ \text { Office Supplies } & 21,200 & \text { Store Supplies } & 15,400\end{array}\) a. Prepare a multiple-step income statement for the year ended March 31, 2010 . b. Compare the major advantages and disadvantages of the multiple-step and singlestep forms of income statements.

The debits and credits from four related transactions are presented in the following \(\mathrm{T}\) accounts. Describe each transaction. \begin{tabular}{r|rrrrrrr} \multicolumn{2}{c}{ Cash } & & \multicolumn{4}{c}{ Accounts Payable } \\ \cline { 5 - 7 } & \((2)\) & 250 & & \((3)\) & 500 & \((1)\) & 8,000 \\ & \((4)\) & 7,350 & \((4)\) & 7,500 & \end{tabular} Merchandise Inventory \begin{tabular}{lr|lr} \hline\((1)\) & 8,000 & \((3)\) & 500 \\ \((2)\) & 250 & \((4)\) & 150 \end{tabular}

On May 31, 2010, the balances of the accounts appearing in the ledger of Champion Interiors Company, a furniture wholesaler, are as follows: \(\begin{array}{lrlr}\text { Accumulated Depr.-Building } & \$ 30,460 & \text { Notes Payable } & \$ 24,000 \\ \text { Administrative Expenses } & 65,300 & \text { Salaries Payable } & 680 \\ \text { Building } & 55,680 & \text { Sales } & 313,540 \\ \text { Cash } & 8,840 & \text { Sales Discounts } & 18,000 \\ \text { Cost of Merchandise Sold } & 188,000 & \text { Sales Returns and Allow. } & 12,000 \\ \text { Interest Expense } & 1,920 & \text { Sales Tax Payable } & 4,900 \\ \text { Jessica Duerr, Capital } & 141,155 & \text { Selling Expenses } & 124,000 \\ \text { Jessica Duerr, Drawing } & 7,950 & \text { Store Supplies } & 4,580 \\ \text { Merchandise Inventory } & 26,000 & \text { Store Supplies Expenses } & 2,465\end{array}\) Prepare the May 31, 2010, closing entries for Champion Interiors Company.
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