Reference no: EM133057224

Question - Ontime plc (Ontime), a manufacturer of sundials has four main suppliers. The company's finance director has asked you as his assistant to prepare an analysis of the cost of using trade credit as a source of finance. Your initial analysis has identified that each supplier offers different terms of trade. Specific details are as follows:

Supplier No. 1 Charges 1.5% of the invoice value per monthly period from the date on which payment is due.

Supplier No. 2 Charges a fixed penalty of 2.5% of the invoice value for late payment. This penalty is charged even if the payment is only one day late.

Supplier No. 3 Offers a 2.5% discount if payment is received within one month of the invoice date. Payment after one month is net invoice value.

Supplier No. 4 Charges 12% per annum simple interest on the invoice value if payment is made after the due date.

Notes: (a) Total purchases from all suppliers are $10m.

(b) 40% of purchases are made from supplier No. 1 with the remainder being equally split between supplier No. 2, 3 and 4.

(c) All four suppliers have a due date for payment one month from the invoice date.

(d) Ontime takes three months to pay each of the four suppliers. (e) Ontime's cost of funds is normally 10%.

Required -

(i) Calculate the NET annual cost of delaying payment beyond the agreed time, as is currently being practised by Ontime, to each of the four suppliers. Identify which, if any, of the trade credit arrangements is financially beneficial to Ontime.

(ii) Identify and briefly discuss THREE (3) advantages and THREE (3) disadvantages to Ontime of using the delaying of payment to suppliers as a source of finance.