Discounts: Trade and Cash Chapter Eleven McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning unit objectives LU 11-1: Trade Discounts—Single and Chain (Includes Discussion of Freight) Calculate single trade discounts with formulas and complements. Explain the freight terms FOB shipping point and FOB destination. Find list price when net price and trade discount rate are known. Calculate chain discounts with the net price equivalent rate and single equivalent discount rate. LU 11-2: Cash Discounts, Credit Terms, and Partial Payments List and explain typical discount periods and credit periods that a business may offer. Calculate outstanding balance for partial payments.

Invoice

Trade Discount Amount & Net Price Formulas Trade discount amount = List price x Trade discount rate $1,943.88 = $7,775.50 x 25% Net Price = List price -- Trade discount amount $5,831.62 = $7,775.50 – $1,943.88 11-4

Freight Terms From Buyer Prospective FOB Shipping Point - FOB Boston - Change to Massachusetts!! FOB Shipping Point - FOB Boston - buyer pays the freight cost The buyer in San Diego pays the freight buyer seller From Seller Prospective FOB Destination - FOB San Diego - seller pays the freight cost the seller in Boston pays the freight 11-5

Single Trade Discount The price of a Macintosh computer is $2,700. The manufacturer offers a 40% trade discount. What are the trade discount amount (TDA) and the net price? TDA = $2,700 x .40 = $1,080 Net price = $2,700 -- $1,080 = $1,620 11-6

Complement Complement 60% 40% Trade Discount Complement - The difference between the single discount rate and 100%. The complement is what percentage the buyer will pay. Complement 60% 40% For example, if the trade discount is 40%, the complement is 60% (100% -- 40%). Trade Discount Using Complement: $2,700 x .60 = $1,620 11-7

Calculating List Price When Net Price & Trade Discount Rate Are Known List Price = Net Price . Complement of trade discount rate Example: A Macintosh computer has a $1,620 net price and a 40% trade discount. What is the list price? 100% -- 40% = 60% $1,620 .60 = $2,700 list price 11-8

Calculating Net Price with a Chain Discount The price of office equipment is $15,000. With a chain discount of 20/15/10, what is the net price? $15,000 x .20 $ 3,000 $15,000 -- 3,000 $12,000 x .15 $1,800 $12,000 -- 1,800 $10,200 x .10 $1,020 $10,200 -- 1,020 $9,180 Net Price 11-9

Warning: Do not just add up the discounts to calculate the discount! Chain Discounts Chain discounts are trade discounts in a series of two or more successive discounts. For example: 20/15/10. To find the net price equivalent rate, multiply the complements: 100% 100% 100% - 20 - 15 - 10 .80 x .85 x .90 = .612 net price % Warning: Do not just add up the discounts to calculate the discount! 20 + 15 + 10 = 45% .20 x .15 x .10 = .388 net trade discount 11-10

Calculating Net Price Using Net Price Equivalent Rate The price of office equipment is $15,000. With a chain discount of 20/15/10, what is the net price? Find the net price equivalent rate by multiplying the complements: .80 x .85 x .90 = .612 To find the net price, multiply the net price equivalent rate by the list price: $15,000 x .612 = $9,180 Trade discount amount: $15,000 -- $9,180 = $5,820 11-11

Calculating Trade Discount Amount Using Single Equivalent Discount Rate The price of office equipment is $15,000. With a chain discount of 20/15/10, what is the net price? Find the net price equivalent rate by multiplying the complements: .80 x .85 x .90 = .612 To find the single equivalent discount rate, subtract the net price equivalent rate from 1: 1.00 -- .612 = .388 Trade discount amount: $15,000 x .388 = $5,820 11-12

CALCULATING TRADE DISCOUNT TO MATCH A COMPETITOR’S PRICE EXAMPLE Suppose you are the marketing manager for a car radio distributor. If you currently offer a 15% trade discount for a radio with a list price of $225, what additional trade discount must you offer to match a competitor’s net price of $145? Step 1. Trade discount x List price = Net price Complement of 15% trade discount: 100% - 15% = 85%, or .85 (.85 x D) x $225 = $145 (.85 x $225)D = $145 (regroup) Step 2. 100% - 76% = 24% $191.25D = $145 $191.25D $191.25 = $145 15/24 chain discount D = .76, or 76% 11-13

Invoice 11-14

Cash Discounts A cash discount is for prompt payment. It is not taken on freight, returned goods, sales tax, or trade discounts. Credit Period Mar. 1 Mar. 31 Time period sellers give buyers to pay invoices. Discount Period Mar. 1 Mar. 10 Time period buyer has to take advantage of cash discount. 11-15

Ordinary Dating Method 2/10, n/30 is read: “two ten, net thirty” Example: $400 invoice dated July 5; terms 2/10, n/30; paid on July 11. $400 x.02 = $8 cash discount $400 -- $8 = $392 paid or $400 x .98 = $392 11-16

Receipt of Goods (ROG) 3/10, n/30 ROG - Cash discount period begins when the buyer receives the goods. Example: $900 invoice dated May 9, received goods July 8; terms 3/10, n/30 ROG; paid on July 20. 11-17

End of Month (EOM) 1/10 EOM -- 1% discount, up until the 10th of the following month. Example: $600 invoice dated July 6; no freight or returns; terms 1/10 EOM; paid on August 8. $600 x .01 = $6 $600 -- $6 = $594 or $600 x .99 = $594 11-18

End of Month (EOM) 2/10 EOM – Considered the “25th rule;” skip a month Example: $800 invoice dated April 29; no freight or returns; terms 2/10 EOM; paid on June 18. No discount; $800 paid. 11-19

Solving a Word Problem with Trade and Cash Discount The Word Problem Hardy Company sent Regan Corporation an invoice for office equipment with a $10,000 list price. Hardy dated the invoice July 29 with terms of 2/10 EOM (end of month). Regan receives a 30% trade discount and paid the invoice on September 6. Since terms were FOB destination, Regan paid no freight charge. What was the cost of office equipment for Regan? 1. Calculate the net price. $10,000 x .70 = $7,000 100% - 30% (trade discount) 2. Calculate the discount period. Sale: 7/29 Month 1: Aug. Month 2: Sept 10 Paid on Sept. 6—is entitled to 2% off. If you save 2 cents on a dollar, you are spending 98 cents. 3. Calculate the cost of office equipment $7,000 x .98 = $6,860 100% - 2% 11-20

Partial Payment Molly McGrady owes $400. Molly’s terms were 2/10, n/30. Within 10 days Molly sent in a payment of $80. How much is her new balance? 100% -- 2% = .98 Step 1. Find the complement of discount rate. $80 .98 = $81.63 Step 2. Divide partial payment by the complement (amount credited). (amount credited) (1 -- .02) Step 3. Subtract Step 2 from the total owed (outstanding balance). $400 -- $81.63 = $318.37 (outstanding balance) 11-21