Langley Clinics, Inc buys $400,000 in medical supplies each year (at gross prices) from its major suppliers, 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% annual cost.
b. What is the amount of costly trade credit?
c. What is the approximate annual cost of the costly trade credit?
d. Should Langley replace its trade credit with the bank loan? Explain.