Math for Merchandising Tutorial 2
Purpose: This tutorial covers concepts in chapter four in Math for
Merchandising. We will first cover the concepts and then work through
some common examples that represent the concepts. Then you should
be able to do the assigned homework problems without too much
distress!!!!!
Chapter Four
Buying goods to make profits requires negotiation. This negotiation is
often over the “terms of trade”. The terms of trade include the price
you will pay including any negotiated discounts, the payment date and
terms, and the shipping arrangements.
The vendor wants to sell merchandise at the highest price but the
buyer wants the lowest price. The quoted cost price can be reduced by
discounts such as: trade, quantity, seasonal, or promotional.
A trade discount is deducted from the cost price or list price because
the buyer is in the same business as the seller.
A quantity discount is given for purchasing large amounts in bulk.
A seasonal discount is given for merchandise purchased prior to a
normal buying season or after the traditional selling season.
Promotional discounts are given to help a merchant advertise a
manufacturer’s product or service.
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When series discounts are given, each is taken individually and not
added together. So take the first discount, then subtract the portion
from the total, and then take the next discount and then subtract that
portion from the remaining total amount after taking the first discount.
It is incorrect to add series discounts together before multiplying the
first total amount by the first discount.
So if you purchase fabric for $8.50 per yard with series discounts of
20/10, what is the final amount you pay per yard? The first 20% or 0.20
discount gives $1.70 that we subtract from the $8.50 total amount to
get $6.80. Then we multiply the $6.50 total amount left by the 10%
discount or 0.10 to get $0.68 cents and subtract from the $6.80 to get
$6.12. So this is the amount we pay per yard.
It is in the interest of a retailer to take as many discounts offered. Often
a vendor will offer a cash discount to encourage quick payment. It is
necessary to give a retailer credit so they can buy your products. But
you want them to pay as soon as possible. The cash discount is given to
encourage this quick payment. Cash discounts are taken after all other
discounts are taken and are only given if the bill is paid within the
specified number of days in the negotiated terms of trade. Sometimes
no discount is given. If the word net or letter n is given in the terms of
trade, it means NO discount. Cash discounts are always combined with
specific dating terms.
When written out, cash discounts and payment days look like fractions.
For example 2/10 n 30 means a 2% discount is earned if the bill is paid
within 10 days of the date on the invoice. If not paid within the 10 days,
there will be no cash discount and the full amount of the invoice must
be paid within 30 days of the date on the invoice. If n or net is not given
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in the terms of trade, then one can still assume 30 days are given to
pay.
There are different kinds of cash discounts. These methods depend on
the practice of setting a specific time for paying a bill. What day a bill
must be paid depends on the calendar that is used. Some businesses
use a 30-day month calendar. Others use the regular calendar which
has the following number of days:
January 31
February 28 or 29
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
Terms of trade will include letters like DOI, ROG, EOM or advanced
dating. DOI means date of invoice and is the ordinary dating method.
ROG stands for receipt of goods. EOM stands for end of month.
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Advanced dating is called as of dating, future dating, or seasonal dating.
It is used for large purchases such as when opening a new store. So
terms of trade such as 8/10 n/30 as of September 5 means you have
until September 15 to take the 8% discount. Extra dating is an
allowance of extra days given beyond the normal dating agreements.
So if an invoice is dated September 15 and the terms of trade read
3/10-60X then the cash discount can be taken as late as November 25
which is 10 days beyond September 15 plus an additional 60 days which
takes 5 days from the 60 to finish of September, and then 30 days to
finish of October and the remaining 25 days in November (assuming a
30 day month).
Shipping terms have to be decided as well. FOB store or destination
means that the manufacturer owns the goods and pays all freight
charges until the goods reach the retailer or buyer. FOB Factory or
Shipping Point has the buyer paying the freight. Sometimes the
manufacturer will pre-pay but may or may not charge the buyer.
So we can use the above information to determine when payments
should be made to take the cash discount but not too soon to use up
scarce cash.
Here is a problem to solve. A bill is for $4000 with terms 2/10-60X. How
much would be remitted if the bill were paid within the cash discount
period and how many days does the merchant have to pay the bill? If
we take 2% of the $4000 we get $80 and then subtract from the $4000
we would pay $3920 and we have 70 days to pay the amount in order
to get the discount.
Here is another problem to solve. Use the 30 days a month calendar. An
invoice is dated May 12, and goods are delivered to the store on May
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25. If we have 3/10 net 30, what is the last day for the discount? It is
May 22. What if the terms were 2/10-30X? It would be May 12 + 10
days + 30 extra days. It would be June 22 using the 30 days a month
calendar. If the terms are 3/15, n/60 ROG we would use when we get
the goods which is May 25th. So we have 5 days left in May and 10 days
left for June which gives June 10th.
So we need to be able to understand the “terms of trade” as these will
be negotiated and you need to understand what your business
acquaintance is talking about.
Now you should be able to do cash discount problems.
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