CHAPTER 7:

TRADE AND CASH DISCOUNT

INTRODUCTION
 This chapter covers the mathematics needed for working with invoices and discounts mathematics of buying.  Retail business make a profit by purchasing items and then selling them for more than they cost.  There are several steps in this process:

Manufacturers buy raw material, components part, and assemble them into products that can be sold to other manufacturers or wholesalers.

Wholesaler buys from manufacturers or other wholesalers and sells to the retailer.

Retailer will sell directly to the ultimate user, the customer.

TRADE DISCOUNT
 Trade discounts are often given to the businesses or individuals who buy an item for resale or produce an item that will then be sold. Retailers usually pay for the goods at prices lower than the list price (the suggested price at which the item can be sold to the public).  The prices that the retailers pay after reduction in prices is called the net prices.

TRADE DISCOUNT (cont d)

 The difference between the list price and the net price is called trade discount. Trade discount = List price Net price  Normally, a manufacturer quotes a discount rate to the retailer which is called the trade discount rate.  The trade discount rate must be calculated on the list price.

TRADE DISCOUNT (cont d)

 The formula to calculate the amount of trade discount is given as:
Amount of trade discount = List price x Trade discount rate

Example 1: The list price of a wallet is RM250. A trade discount of 25% is offered. What is the net price of the wallet?

FORMULA FOR FINDING THE NET PRICE

From Net price = List price Trade discount we get: NP = L Lr NP = L (1 r) where NP = Net price L = List price r% = trade discount

Example 2: Ladylike offers a discount of 32 % on all jeans it sells. What is the net price of a pair of jeans that is listed at RM420?

Example 3: Berjaya Trading sells an item for RM100 less 20% while Muafakat Trading sells the same item for RM120 less 40%. Find the net prices of the item for the two shops.

Example 4: A bill of RM600 including a prepaid handling charge of RM40 is offered a trade discount of 12%. What is the net price?

CHAIN DISCOUNT
 What is the difference between a single discount and chain /series discount?  In all examples above, we only discussed about a single discount that was offered. But sometimes two or more discounts are combined into a series or chain discount. In chain discount, each discount rate is calculated on the successive net amount.

Example 5: Vision Computer offers a line of computers for RM6000 less 25% and 10% each. Find the net price and the total discount.

NOTE: The chain discount of 25% and 10% is not the same as 35% since the 10% discount is based on the net amount after the first discount and not on the list price.

FORMULA FOR FINDING THE NET PRICE FOR A CHAIN DISCOUNT

Example 6: A sofa set with a catalogue price of RM2500 is offered a chain discount of 30%, 10% and 5%. Calculate the net price.

Example 7: A washing machine is advertised at RM2000 less 40%, 12% and 2 %. Find the net price.

SINGLE DISCOUNT EQUIVALENT, r

Example 8: Find the single discount equivalent of 15% and 4%.

Example 9: A product is advertised at RM2000 less 20%, 10% and 5%. Find: a) The single discount equivalent b) The net price

CASH DISCOUNT (ORDINARY DATING METHOD)  A credit or discount is offered if the buyer chooses to pay early and or with cash.  If the bill is settled within the specified period, the buyer needs only to pay the net amount after deducting the cash discount from the amount in the invoice.  For example, a supplier may offer cash discount term of 2/10, net 30, which means that a 2% discount is given for payment within 10 days or the full amount is due in 30 days.

CASH DISCOUNT (ORDINARY DATING METHOD)  Another example is 3/10, which means if the buyer pays 10 days from the date of invoice, he is entitled to the 3% cash discount.  This is common type of cash discount terms that we called ordinary dating. # With the ordinary dating, count days from the date of invoice.

Example 10: Explain the cash discount terms: a) 5/10, 3/20, n/30 b) Net 30

Example 11: The total of an invoice with cash discount term 4/15, n/30 amounts to RM 3400 which includes a prepaid freight charge of RM 150. Find the amount that is needed to pay the invoice within the cash discount period.

BORROWING TO TAKE ADVANTAGE OF THE CASH DISCOUNT  Not many businesses have sufficient cash in hand to take advantage of the cash discounts offered.  Many of these companies borrow from banks using short-term loans to take advantage of the offer.

Example 12:
On 15 July, Qalesya purchased some books invoiced at RM 3000 with cash discount terms of 3/10, n/30. In order to pay the invoice on 25 July, she borrowed the money for 20 days at 9% per annum simple interest. How much did she save by borrowing to take advantage of the discount? Solution: Cash discount = Principal borrowed = Credit period = Interest incurred on the borrowing = Amount saved = cash discount - interest

PARTIAL PAYMENT OF INVOICE  If a buyer pays only part of the invoice within the discount period, he receives a proportionate fraction of the cash discount that is offered.  The buyer will only receive the full amount of the cash discount if he settles all the payment. Amount paid = Credit given x (1 discount rate) Amount outstanding = Amount due Credit given

Example 12:
An invoice amounting to RM4000 and dated 10 May 2009 offers cash discount terms of 6/10, n/30. Find the amount outstanding if the buyer pays RM2000 on 19 May 2009.

TRADE AND CASH DISCOUNTS

 For the cases where the trade discount and cash discount are offered simultaneously. Example 13:
An invoice of RM8500 dated 20 July 2008 was offered 10% and 20% trade discount with cash discount terms of 5/10, 3/20 and n/30. Calculate the payment if it was settled on 25 July 2008.