Instruction 19.1: Use the information to answer the following question(s).
Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.
-Refer to Instruction 19.1. Should Sunny Manufacturing take the discount offered by Sun Chemical?
A)Yes, Sunny Manufacturing will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days.
B)No, Sunny Manufacturing will not have to pay any interest if they just pay in 45 days.
C)Yes, Sunny Manufacturing's short term borrowing rate of 9.6% is less than Sun's offered cost of carry of 22.9%.
D)No, it costs Sunny Manufacturing 22.9% to accept the discount and they are better off paying the full amount in 45 days.

Question

Quizplus · Accepted Answer

The cost of not taking the discount is higher than the short-term borrowing rate. The cost of not taking the discount is calculated as (2% / (1 - 0.02)) * (365 / (45 - 10)) = 22.9%, which is higher than the 9.6% borrowing rate.