| Langley Clinics, Inc. buys $400,000 in medical supplies a year (at gross prices) from its major supplier, |
| Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the |
| supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and |
| replacing the trade credit with a bank loan that has a 10 percent annual cost. |
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| a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume |
| 360 days per year throughout this problem.) |
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| b. What is the amount of costly trade credit? |
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| c. What is the approximate annual percentage cost of the costly trade credit? |
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| d. Should Langley replace its trade credit with the bank loan? Explain your answer. |
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| e. If the bank loan is used, how much of the trade credit should be replaced? |
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