|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.|
|a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume|
|360 days per year throughout this problem.)|
|b. What is the amount of costly trade credit?|
|c. What is the approximate annual percentage cost of the costly trade credit?|
|d. Should Langley replace its trade credit with the bank loan? Explain your answer.|
|e. If the bank loan is used, how much of the trade credit should be replaced?
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