Lecture Practical business math procedures (11/e) - Chapter 7: Discounts: trade and cash

After completing this chapter, students will be able to: 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,...

Chapter Seven

Discounts: Trade

and Cash

LU 7-1: Trade Discounts—Single and Chain

(Includes Discussion of Freight)

1. Calculate single trade discounts with formulas

and complements

2. Explain the freight terms FOB shipping point

and FOB destination.

3. Find list price when net price and trade discount rate are known

4. Calculate chain discounts with the net price equivalent rate and

single equivalent discount rate

LU 7-2: Cash Discounts, Credit Terms, and Partial Payments

5. List and explain typical discount periods and credit periods that a

business may offer

6. Calculate outstanding balance for partial payments

Learning unit objectives

Invoice

Trade Discount Amount &

Net Price Formulas

List price x Trade discount rate = Trade discount

amount

List price Trade discount amount = Net

Price

$5,678 1,419.50 = $4,258.50

$5,678 x 25% = $1,419.50

Freight Terms

FOB Shipping Point -

FOB Destination

FOB San Diego

-b

u

y

e

r

s e ll e r

From Buyer Prospective

From Seller Prospective

buyer pays the freight cost the buyer in San Diego pays the freight

seller pays the freight cost the seller in New Jersey pays the freight FOB New Jersey

Complement - The difference between the single discount rate and 100%

The complement is what percentage the buyer will pay

For example, if the trade discount is 25%, the complement is 75%

(100% 25%)

75%

Trade

Discount

Complement

25%

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

Using Complement:

$2,700 x 60 = $1,620

Calculating List Price When Net Price & Trade

Discount Rate Are Known

List Price = Net Price .

Complement of trade discount rate

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

Example:

Warning: Do not just add up the discounts to

calculate the discount!

20 + 15 + 10 = 45%

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

%

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

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

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

Cash Discounts

Credit Period

Time period sellers give buyers to pay invoices

Discount Period

A cash discount is for prompt payment It is not taken on freight,

returned goods, sales tax, or trade discounts

Invoice

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 $8 = $392 paid

or

$400 x 98 = $392

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

End of Month (EOM)

1/10 EOM 1% discount, up until the 10th of the following month

$600 x 01 = $6

$600 $6 = $594

or

$600 x 99 = $594

Example: $600 invoice dated July 6; terms 1/10 EOM; paid on August 10.

End of Month (EOM)

2/10 EOM – Considered the “25th rule;” skip a month

No discount; $800 paid

Example: $800 invoice dated April 29; terms 2/10 EOM; paid on June 18.

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

$400 $81.63 = $318.37

$80 .98 = $81.63

Step 1 Find the complement of discount rate

(1 02)

Step 2 Divide partial payment by the complement (amount credited)

Step 3 Subtract Step 2 from the amount owed (outstanding balance)