The following scenario relates to questions 26-30.
Martin Co is concerned about its cash position and has taken to delaying payments to some suppliers in order to ease that problem. Each month the purchase ledger department sorts the total value of invoices for that month into three sub-divisions, X, Y and Z depending on the priority of invoice.
Division X invoices, amounting to $2,000,000, are urgent and paid after 30 days
Division Y invoices, amounting to $3,000,000, are less urgent and paid after 60 days; and Division Z invoices, amounting to $4,000,000, are least urgent and paid after 90 days.
Several suppliers have reacted to this by offering Martin Co a 2% cash discount if the accounts are settled within 15 days. Martin Co is currently considering whether or not to accept this. Another supplier, who Martin Co now waits 90 days to pay, has been threatening legal action over the $300,000 currently owed. Martin Co feels that some sort of compromise might be needed.
Martin Co’s cost of capital is 12% per annum.
Assume that there are 30 days in a month and that purchases accrue evenly over the year.
26. Martin Co is considering the advantage of the early settlement discount from those it currently pays after:
1. 60 days
2. 90 days
From which payables should Martin take the 2% cash discount?