Need help figuring this problem! A firm buys on credit terms of 2/10, net 30 days, and always pays on Day 30?

Question

If I calculate that this policy costs my firm $300,000 each year what is the firm's average accounts payable balance?

I am unsure how to figure the average accounts payable balance.

Answer 1

I'm not sure what you are after, but you need the discount amount, (2%) if paid in 10 days, right or wrong ?

So if you had a single $ 300,000 invoice and pay it inside the 10 days, the payment would be $ 294,000, saving the 2% = $ 6,000.

The remainder of the question is basic math, once you understand the concept, another example: $ 300,000 divided by
12 months = $ 25,000 monthly average balance, would also =
$ 500 monthly savings for taking the discount.

Answer 2

i'm not sure if this is right or not but i have come up with 1.25 million. i calculated that they are missing the 2% discount by not paying early ( 300,000 / 2%) = 15 million, then i took the 15 mil and divided it by 12 to get the monthly amount. i hope this is what you are looking for

Answer 3

2% x X = $300,000/12 therefore, X = $1,250,000
Another way to look at it is that if the firm had an A/P balance of $1,250,000 they are passing up on $1,250,000 x 2% or $25,000/mo. or $300,000 per year.