| Langley Clinics, Inc. buys $400,000 in medical supplies a year (at gross prices) from its major supplier, | ||||||||
| Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the | ||||||||
| supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and | ||||||||
| replacing the trade credit with a bank loan that has a 10 percent annual cost. | ||||||||
| a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume | ||||||||
| 360 days per year throughout this problem.) | ||||||||
| b. What is the amount of costly trade credit? | ||||||||
| c. What is the approximate annual percentage cost of the costly trade credit? | ||||||||
| d. Should Langley replace its trade credit with the bank loan? Explain your answer. | ||||||||
| e. If the bank loan is used, how much of the trade credit should be replaced? | ||||||||
