Reference no: EM132594705

Mr. Lee of Red River Consumer Products in Winnipeg is considering a new product for his sales inventory. He has researched the market for similar products and decided that he could generate a profit if he offered the item in question at a unit selling price of $100. This price is considerably lower than the $125 for the same item his competitor has listed. Red River's forecast volume of sales for the first year is 8000 units. The annual fixed cost for adding this product to the inventory is estimated to be $200,000.

The net price, after the standard supplier discount of 25% plus an additional 10% for early order placement, is $60 per unit delivered. Since the product is market-ready, this is also the unit variable cost. The supplier guarantees the products will be available for sale in store 60 days from date of order.

Under current economic conditions, the supply chain cash flow is tight. The supplier requires payment in full upon receipt of order. In addition, the supplier is offering a cash incentive of 1% of the total order value if Mr. Lee will commit to a 25% deposit of the total order value, non-refundable, when the order is placed.

Mr. Lee is evaluating this option. He had decided to finance the purchase of this new inventory using a personal asset valued at $600,000 USD. The plan is to make a loan to his business. He prefers this alternative to bank financing and he is certain the product will generate a profit for his investment. His intention is to convert the asset to Canadian funds and invest it in two successive 30-day GIC's in order to accrue interest on this sum while waiting for the goods to arrive. The bank is offering a rate of 3.25% pa and the current exchange rate is 1CAD=0.900USD. He must decide whether to take the supplier's offer or stick to his original plan and invest the full sum into GIC's.

What is the value of the cash discount offered by the supplier?