The Approximate Effective Cost (EC) of Financing the Discount Price

question 59

Multiple Choice

The approximate effective cost (EC) of financing the discount price of trade credit under terms 2/10, net/30 using a 360 day year is:

• A) 25%
• B) 30.1%
• C) 37.2%
• D) 42.5%

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Definitions:

Diminishing Returns

An economic principle stating that if one factor of production is increased while others remain constant, the overall returns will eventually decrease after a certain point.

Average Product

The output per unit of a specific factor of production, calculated by dividing total production by the quantity of the employed factor.

Law of Diminishing Returns

An economic principle stating that if one factor of production is increased while other factors are held constant, the resulting increase in output will eventually decrease.

Fixed Input

Production factor that cannot be varied.