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Discounts: Trade Discount and Cash Discount

Trade Discount

 

Trade discount is applied on the List price.  List price is usually the amount on the price tag.  The value of trade discount depends on the rate of discount.  The price after any trade discount is known as the Net price.

Formula 1:

Net Price = List Price (1-Rate of Discount) or N = L (1-d)

  • To find the net price, list price or the rate of discount, depending on the unknown or the missing piece of information (i.e. given net price, rate of discount; find list price)

 

 

Example 1: A department store lists a product for $200 less 20%.  To improve the sales, the net price is reduced to $120.  What additional rate of discount is given by the store?

 

Solution 1: 

 

Given: List price (L), Net price (N)

Find: Rate of Discount (d)

List Price (L) :

= $200 x (1-20%)

= $200 x 0.8

= $160

N = L (1-d)

$120     = $160 (1-d)

(1-d)      = $120/$160

(1-d)      = 0.75; d = 0.25 or 25%

Therefore, the additional rate of discount is 25%.

 

 

Multiple Discounts

 

Multiple discounts involve more than one trade discount.

Formula 2:

N = L (1-d1) (1-d2) (1-d3) ... depending on the number of trade discounts

 

*A single rate of multiple discounts is simply computed by multiplying 1- [(1-d1) (1-d2) (1-d3) ...]

 

 

Example 2: What is the list price of an item that is subject to a series of discounts of 15%, 10%, 5%, if the net price is $500?  What is the equivalent single rate of discount?

 

Solution 2:      

 

Given: Net price (N), Rates of discount (d1, d2, d3)

Find: List price (L)

 

N = L (1-d1) (1-d2) (1-d3)

$500     = L (1-15%) (1-10%) (1-5%)

$500     = L (0.85) (0.9) (0.95)

$500     = L (0.72675); L = $687.99

Therefore, the list price is $687.99.

 

Find: Equivalent single rate of discount (d)

d          = 1- [(1-d1) (1-d2) (1-d3)]

= 1- [(1-15%) (1-10%) (1-5%)]

= 1- [(0.85) (0.9) (0.95)]

= 1-0.72675 = 0.27325 or 27.33%

Therefore, the single rate of discount is 27.33%.

 

 

Cash Discount

 

Cash discount is applied on the Net price.  In other words, it is a type of discount that is applied after all trade discounts.  Cash discounts largely depend on the terms, dating methods, **and the date of payment.  The price after any cash discounts is called the selling price.

 

Formula 3:

Selling Price = Net Price (1-Rate of Cash Discount)

 

 

**Three different Dating Methods:

1)       Ordinary Dating

2)       End-of-the-month (or proximo) Dating (EOM)

3)       Receipt-of-goods Dating (ROG)

 

 

Terms:

For example,        5/15, 2/30, n/60

It is expressed as "the customer will get 5% cash discount if he/she pays within 15 days; while he/she will get 2% cash discount if he/she pays within 30 days; and the net amount in full within 60 days.

                       

 

Example 3:     

 

Date of Invoice: November 18, 2002

Date of Goods Delivered: November 28, 2002

Date of Goods Received: December 12, 2002

Date of Payment: December 24, 2002

Given terms: 5/15, 2/30, n/60

Invoice Amount: $5000

What is the amount of discount using each of the three methods?    

 

Solution 3:      

Dating Methods

Starting Date of discount period

Ending Date of the 1st discount period

Ending Date of the 2nd  discount period

Amount of Discount

A. Ordinary

November 18

December 3*

December 18

$0**

B. EOM

November 30

December 15

December 30

$100

C. ROG***

December 12

December 27

January 11

$250

 

*Counting of Discount Period

            Starting Date: November 18

            Discount duration: 15 days

            November has 30 days; 30-18=12 à 3 more days in the next month; therefore,

            Ending Date: December 3

 

**Amount of Discount

A.      No Discount after the discount period -- $0

B.      Paid within the 2nd discount period -- $5000 x 2% = $100

C.      Paid within the 1st  discount period -- $5000 x 5% = $250

 

***Starting Date of Discount Period

A.      Ordinary - Date of Invoice

B.      EOM - The last day of the month of the date of invoice

C.      ROG - The date of goods received

 

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