The Dud Company purchases raw materials on terms of “2/10, net 30.” A review of the company’s records by the owner, Ms. Dud, revealed that payments are usually made 15 days after purchases are received. When asked why the firm did not take advantage of its discounts, the bookkeeper, Mr. Blunder, replied that it costs only 2 percent for these funds, whereas a bank loan would cost the firm 12 percent.

a. What mistakes is Mr. Blunder making?

b. What is the real cost of not taking advantage of the discount?

c. If the firm could not borrow from the bank and were forced to resort to the use of trade credit funds, what suggestion might be made to Mr. Blunder that would reduce the annual interest cost?