In This Problem, Use the Approximation Formula to Find the Cost

question 78

Multiple Choice

In this problem, use the approximation formula to find the cost of trade credit.A firm's payments policy calls for stretching payments to its supplier, who sells on terms of 3/20, net 60.Payment is made in 90 days, and the cash saved is invested in a money market mutual fund paying 12 percent interest.This policy is a net ____.

• A)Profitable; gain of about 9 percent on the funds involved.
• B)Profitable; gain of about 12 percent on the funds involved.
• C)Unprofitable; loss of about 4 percent on the funds involved.
• D)Unprofitable; loss of about 9 percent on the funds involved.
• E)Insufficient information to solve.

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Definitions:

Accounting Profit

The net income for a company after all expenses have been deducted from total revenue, following standard accounting practices.

Total Revenue

Total Revenue refers to the total receipts from sales of goods and services over a given period, calculated as the quantity sold multiplied by the price.

Economic Profit

The gap between the money made from sales and the forgone benefits of the inputs employed.

Total Revenue

The total amount of money generated by the sale of goods or services related to the company's primary operations.