Trade and Cash Discount Cases

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Sherry,

Need the formulas inside the Excel spreadsheet. Also has a questions at the bottom of each page.

8-1 Image Manufacturing’s Rebate Offer

Misuse and abuse of trade discounts infringe on fair trade laws and can cost companies stiff fines and legal fees. One way to avoid misuse is to establish the same discount for everyone and give rebates based solely on volume. Image Manufacturing, Inc., uses this policy for parts sales to companies that manufacture cameras. For example, one digital camera component, a special hinge, sells for $3 to a company buying 15,000 pieces per month. In an effort to run more cost-efficient large jobs and capture market share, Image Manufacturing will give an incentive for higher volume. It offers a 5% rebate on orders of 20,000 pieces per month, or a 17-18 cents apiece rebate for orders of at least 22,000 pieces per month. The increased volume needed for a rebate is determined by market research that tells Image Manufacturing factors such as the volume a customer is capable of ordering per month and the volume and cost of the same part a customer currently buys from other suppliers. The rebate amount is determined by Image Manufacturing’s profit margin and the company’s ability to acquire sufficient raw materials to produce larger volumes without raising production costs. In some industries this is called a bill-back because the buyer receives credit toward the next order rather than a rebate check.

  1. Complete Cameras, Inc. currently orders 15,000 hinges per month from Image Manufacturing at $3 each, which is about half of what they buy each month from other suppliers. If they move 5,000 pieces per month from another company to Image Manufacturing, what will be their rebate on the total order? What will be the discounted cost per piece?
  2. If Complete Cameras, Inc. increases its order to 22,000 pieces per month and negotiates an 18 cents-per-piece trade discount, what will be the rebate? What is the percent of the discount?
  3. In addition to the 18 cent-per-piece trade discount, Complete Cameras, Inc. also receives a 2% cash discount (10 days, net 30). Calculate the rebate and cash discount on a 30,000-piece-per-month order, and then find the net price. Cash discount of 2% is taken after the rebate is applied.
  4. Another company currently orders about 6,000 hinges per month from Image Manufacturing at $3 each. Image Manufacturing’s marketing manager believes this company is capable of expanding its business to 8,000 pieces per month and recommends a rebate of 17 cents per piece if they do so. Rounded to the nearest tenth of a percent, what is the rebate percentage? Do you think this trade discount violates fair trade laws? Why or why not?

8-3 The Artist’s Palette

The Artist’s Palette sells high-end art supplies to the art students at three regional art and design schools in Philadelphia, Washington, D.C., and Baltimore. It carries paints, brushes, drawing pads, frames, charcoal, pastels, and other supplies used in a variety of artistic media. Because its clientele is very discriminating, The Artist’s Palette tends to carry only the top lines in its inventory and it is known for having the best selection on hand. It is rare that an item is out of stock. Artists can visit the store, purchase from The Artist’s Palette catalog, or buy from the secure web site.

  1. The Artist’s Palette purchases its inventory from a number of suppliers and each supplier offers different purchasing discounts. The manager of The Artist’s Palette, Marty Parma, is currently comparing two offers for purchasing modeling clay and supplies. The first company offers a chain discount of 20/10/5, and the second company offers a chain discount of 18/12/7 as long as the total purchases are $300 or more. Assuming Parma purchases $300 worth of supplies, what is the net price from supplier 1? From supplier 2? From which supplier would you recommend Parma purchase her modeling clay and supplies?
  2. What is the net decimal equivalent for supplier 1? For supplier 2?
  3. What is the trade discount from supplier 1? From supplier 2?
  4. The Artist’s Palette recognizes that students may purchase supplies at the beginning of the term to cover all of their art class needs. Because this could represent a fairly substantial outlay, The Artist’s Palette offers discounts to those students who pay sooner than required. Assume that if students buy more than $250 of art supplies in one visit, they may put it on a student account with terms of 2/10, n/30. If a student purchases $250 of supplies on September 16, what amount is due by September 26? How much would the student save by paying early?
  5. Assume that if students buy more than $250 of art supplies in one visit, they may put the charge on a student account with terms of 2/10 EOM. If a student makes the purchase on September 16, on what day does the 2% discount expire? If the purchase is made on September 26, on what day does the 2% discount expire? If you were an art student, which method would you prefer: 2/10, n/30, or 2/10 EOM?

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