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ABC company purchased merchandise from KLM company for $10,000

with terms 2/15, n/40. Should ABC company pay within the discount

period if it has an opportunity to borrow at 10%

Answer :

ABC company should compare the cost of borrowing at 10% to the savings from taking the discount. If the cost of borrowing is lower than the discount savings, it may be more beneficial for ABC company to pay within the discount period.

The terms 2/15, n/40 mean that if ABC company pays within 15 days, it can take a 2% discount on the purchase price. Otherwise, the full amount is due within 40 days.

To decide whether to pay within the discount period, ABC company needs to compare the savings from taking the discount (2% of $10,000 = $200) to the cost of borrowing. If ABC company can borrow at a rate lower than 10%, it may be more cost-effective to pay within the discount period and take the discount. However, if the borrowing cost is higher than the discount savings, it may be more advantageous for ABC company to delay payment until the full amount is due within 40 days.

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