BM PPT

Business Math
Chapter 8: Trade and

Cash Discounts
1
8.1 Trade Discount and Net Price
 Find the trade discount using a single trade

discount rate; find the net price using the trade
discount.
 Find the net price using the complement of the
single trade discount rate.
2
Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
Key Terms
 Suggested retail price, catalog price, list
price: three common terms for the price which
the manufacturer suggests an item be sold to
the consumer.
 Trade discount: the amount of discount that
the wholesaler or retailer receives off the list
price or the difference between the list price and
the net price
3
Key Terms
 Net price: the price the manufacturer or

retailer pays or the list price minus the trade
discount.
 Discount rate: a percent of the list price.
4
Product flow
Manufacturer Wholesaler Retailer Consumer
5
Price flow
Consumer Retailer Wholesaler Manufacturer

List Price Net Price Net Price Cost
$80 $56 $40 $20
30% 50%
off list off list
6
How to find the trade discount
 Using a single trade discount rate:

1. Identify the single discount rate and the list
price.
2. Multiply the list price by the single discount
rate.
 Trade discount = rate x list price
7
Look at this example.
 Trade discount = rate x list price
Find the trade discount for a lamp that retails at
$140 and has a trade discount rate of 45%.
 Trade discount = 0.45 x $140

 Trade discount = $63
 What does the $63 mean?
 That the wholesaler or retailer will not pay $63
of the $140 list price.
8
Try these examples.
 Find the trade discount for a porcelain vase

that lists for $90 and has a trade discount of
70%.
 $63
 Find the trade discount for styling gel that lists

for $13 and has a trade discount of 40%.
 $5.20
9
Find the net price
 Using the trade discount:

1. Identify the list price and the trade discount.
2. Subtract the trade discount from the list
price.
Trade discount = Rate x List Price

Net Price = List Price – Trade discount
10
 Find the net price of a software program that

lists for $220 and has a trade discount of 35%.
 Trade discount = 0.35 x $220 = $77
 Net price = List price – Trade discount
 Net price = $220 - $77 = $143
11
Try these examples.
 Find the net price of a camera that lists for $300

and has a trade discount of 42%.
 $174
 Find the net price of a down jacket that lists for

$150 and has a trade discount of 20%.
 $120
12
Find the net price
 Using the complement of the single trade
discount rate.
 Complement of percent: the difference
between 100% and the given percent.
 Examples:
 The complement of 30% is 70%.
 The complement of 55% is 45%
 The complement of 5% is 95%.
13
How to find the net price
1. Find the complement: subtract the single trade
discount from 100%.
2. Multiply the list price by the complement of the
single trade discount.
Example:
Find the net price of a coffee maker that lists
for $20 and has a trade discount rate of 20%.
80% is the complement of 20%
NP = $20 x 0.80 = $16
14
Try these examples.
 Find the net price of a set of golf clubs that lists

for $1,500 and has a trade discount of 15%.
 $1275
 Find the net price of a bicycle that lists for $102

and has a trade discount of 30%.
 $71.40
15
8.2 Net price and trade
discount series
 Find the net price, applying a trade
discount and using the net decimal
equivalent.
 Find the trade discount, applying a trade
discount series and using the single
discount equivalent.
16
Trade discount series
 Trade discount series or chain discount:
additional discounts that are deducted one after
another from the list price.
 Reasons to use discount series include:

 To encourage volume purchases
 To promote special or seasonal items
 To entice a new client
17
Trade discount series step by step
 An item lists for $400 and has a discount of
20%. $400 x 0.2 = $80 $320
 An additional discount of 10% is taken on the
previous price.
$320 x 0.1 = $32 $288
 An additional discount of 5% is taken on the
previous price.
$288 x 0.05 = $14.40 $273.60
 $273.60 is the final price.
18
Can you add the discounts together
and apply it as one?
 If the item has three discounts of 20%, 10% and
5%, can you add them together and apply a 35%
discount?
 No, because each time you apply the additional
discount, the base becomes smaller.
Directly applying a 35% discount would result in
a final price of $260.
$260 ≠ $273.60
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The net decimal equivalent
 To find the net decimal equivalent of a trade

discount series:
1. Find the net decimal equivalent: multiply the
decimal form of the complement of each
trade discount rate in a series.
2. Multiply the list price by the net decimal
equivalent.
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 Find the net price of an order with a list price of
$600 and a trade discount series of 15/10/5.
 Find the complement of each of the trade
discount rates.
 They are 0.85, 0.90 and 0.95.
Multiply them together.
 The net decimal equivalent is 0.72675
 Apply the net decimal equivalent to the list price.
 NP = 0.72675 x $600 = $436.05
21
Try these examples.
 A tire lists for $85 and has a trade discount

series of 10/10/5. Find the net price.
 $65.41
 A silk tie lists for $125 and has a trade discount

series of 20/10/5. Find the net price.
 $85.50
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8.2.2 Find the trade discount
By applying a trade discount series and using the
single discount equivalent
1. Find the single discount equivalent by subtracting
the net decimal equivalent from “1.”
2. Multiply the list price by the single discount
equivalent.
TD = single discount equivalent x list price
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Key Terms
 Single discount equivalent: the complement

of the net decimal equivalent. It is the decimal
equivalent of a single discount rate that is equal
to the series of discount rates.
 Total amount of a series of discounts = single
discount equivalent x list price
 Net amount you pay = net decimal equivalent x
list price
24
Look at this example
 Use the single discount equivalent to calculate
the trade discount on a $1,500 fax machine
with a discount series of 30/20/10.
 Find the net decimal equivalent by multiplying
the complements of each discount rate. 0.70 x
0.80 x 0.90 = 0.504
 To find the single discount equivalent, subtract
the net decimal equivalent from “1.”
25
(continued)
 Subtract the net decimal equivalent (0.504) from “1” to

find the single discount equivalent.
 The result is 0.496 (or 49.6%).
 The single discount equivalent is 0.496; apply it to the
price of $1,500.
 TD = $1,500 x 0.496 = $744
 The trade discount on the fax machine is $744.
[That is the amount that you do not pay.]
26
8.3 Net amount and the
cash discount
 Find the cash discount and the net amount using
ordinary dating terms
 Interpret and apply EOM terms
 Interpret and apply ROG terms
 Find the amount credited and the outstanding
balance from partial payments
 Interpret freight terms
27
8.3.1 Find the cash discount and
the net amount
 Bills are often due within thirty days from the
date of the invoice.
 To encourage prompt payment, companies offer
an incentive of a cash discount if the invoice is
paid within a specified period.
 “2/10 n/30” means “take a 2% cash discount if
paid within 10 days; pay the net price if covered
within 30 days.”
28
 Find the cash discount for an invoice dated

December 1 for $750 with terms of 2/10 n/30.
 If the invoice is paid on December 9th, for
example, the payment would include the
discount and the amount would be $735.
 If the invoice is paid on or after December 11th,
the amount to pay would be $750.
29
Try these examples
 Annie’s Plants has received an invoice for
$450.00 for potting soil dated November 3 with
terms of 5/10 N/30. If the invoice is paid on
November 12, how much would Annie’s pay?
 $427.50
 What if the bill is paid on November 30?

 They would not be able to take the discount and
would have to pay the full amount of $450.
30
“Thirty days has September…”
 To calculate the exact number of days for a cash

discount, you must know how many days are in
each month, so if you are not sure…learn them.
 There are two tips in the text to help you.
31
Use the complement to find the net
amount of an invoice
 An invoice of $500 which reads 2/10 N/30 tells
you that a discount of 2% is available if the
payment is made within 10 days.
 To calculate the net amount directly, use the
complement of the discount (in this case, 0.98)
and multiply it by the total amount.
 $500 x 0.98 = $490 = net amount to be paid
32
Try this example
 Sycamore Enterprises received a $1,248 bill for
computer supplies dated September 2 with sales terms
of 2/10, 1/15 n/30. A 5% penalty is charged after 30
days. Find the amount due for the following dates:
September 12, September 15, October 1, October 3.
 September 12 (2% discount) = $1,223.04

 September 15 (1% discount) = $1,235.52
 October 1 (no discount) = $1,248.00
 October 3 (5% penalty) = $1,310.40
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8.3.2 Interpret and apply
EOM (end-of-month) terms
 Another type of sales term are EOM terms.
 For example, an invoice might be 2/10 EOM,
meaning that a 2% discount is allowed if the bill
is paid during the first 10 days of the month after
the month in the date of the invoice.
 If the invoice is dated November 19, then the
2% discount is allowed up to and including
December 10.
34
Look at these examples
 An invoice dated March 4 with terms of 3/15
EOM would mean that a 3% discount would be
applicable until April 15.
 An invoice dated August 25 with terms of 5/10
applicable until September 10.
 An invoice dated December 2 with terms of 2/20
applicable until January 20.
35
An EOM exception!
 An exception occurs when the invoice is dated

on or after the 26 of the month.
 The discount would be applicable until the
specified day of the month following the month
of the invoice.
 Example: An invoice dated April 27 with terms
of 3/10 EOM would be eligible for the discount if
the bill is paid on or before June 10.
36
8.3.3 Apply ROG
(receipt of goods) terms
 A cash discount is allowed when the bill is paid
within the specified number of days from the
receipt of goods, not from the date of the
invoice.
 Multiply the invoice amount times the
complement of the discount rate.
 Sales terms stating 1/10 ROG mean that a 1%
discount is applicable 10 days after the goods
are received; not when the invoice is dated.
37
Try this example
 Judy’s Fine Jewelry received an invoice for 50

silver charm bracelets for a total of $550. The
invoice is dated April 1. She received the
bracelets on April 6. If the terms are 3/10 ROG
and the invoice is paid on April 11, how much
will she pay?
 $533.50
38
8.3.4 Find the amount credited and
the outstanding balance
 Partial payment: a payment that does not
equal the full amount of the invoice less any
cash discount.
 Partial discount: a cash discount applied only
to the amount of the partial payment.
 Amount credited: the sum of the partial
payment and the partial discount.
 Outstanding balance: the invoice amount
minus the amount credited.
39
Applying the percentage formula
 In applying the percentage formula to find the
amount credited, the rate is the complement of
the discount rate; the percentage is the partial
payment; and the amount credited is the
base.
 B = P/R
 Sometimes a customer cannot pay the entire
amount of an invoice, but takes advantage of a
discount period to apply that discount to a part of
the total due.
40
 If the Semmes Corporation received a $875 invoice with
terms of 3/10 n/30 and could not pay the full amount
within 10 days, but chose to send in a $500 partial
payment on Day 5, what amount was credited to their
account?
 B (amount credited) = P (partial payment) divided by R
(complement of the discount rate)
 B = 500/0.97= $515.46 = amount credited
 The balance would be the difference.
 $875 - $515.46 = $359.54 = balance
41
8.3.5 Interpret freight terms
 Bill of lading: shipping document that includes
a description of the merchandise, the number of
pieces, weight, name of the consignee (sender),
destination, and method of payment of freight
charges.
 FOB shipping point: “free on board” buyer pays
for shipping when shipment is received.
 Freight collect: The buyer pays the shipping
when the shipping is received.
42
More key terms
 FOB destination: “free on board” at the

destination point. The seller pays the shipping
when the merchandise is shipped.
 Freight paid: The seller pays the shipping
when the merchandise is shipped.
 Prepay and add: The seller pays the shipping
when the merchandise is shipped; but, the
shipping costs are added to the invoice for the
buyer to pay.
43
Remember that cash discounts do
not apply to shipping costs
 Example: The Home Doctor received a shipment of hand
tools with an invoice total of $800 (including shipping) and
sales terms of 3/10 n/30. The invoice is dated June 2 and
the shipping costs are $125. Calculate the payment of the
invoice if it is paid on June 10.
 Subtract the shipping charges: $800–125 = $675
 Apply the discount: $675 x 0.97 = $654.75
 Add the shipping charges back in:
$654.75 + 125 = $779.75= amount to be paid
44

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Business Math

Chapter 8: Trade and

 Find the trade discount using a single trade

 Net price: the price the manufacturer or

Manufacturer Wholesaler Retailer Consumer

Consumer Retailer Wholesaler Manufacturer

$80 $56 $40 $20

 Using a single trade discount rate:

 Trade discount = rate x list price

 Trade discount = 0.45 x $140

 Find the trade discount for a porcelain vase

 Find the trade discount for styling gel that lists

 Using the trade discount:

Trade discount = Rate x List Price

 Find the net price of a software program that

 Trade discount = 0.35 x $220 = $77

 Net price = List price – Trade discount

 Net price = $220 - $77 = $143

 Find the net price of a camera that lists for $300

 Find the net price of a down jacket that lists for

 Find the net price of a set of golf clubs that lists

 Find the net price of a bicycle that lists for $102

 Reasons to use discount series include:

 To find the net decimal equivalent of a trade

 A tire lists for $85 and has a trade discount

 A silk tie lists for $125 and has a trade discount

 Single discount equivalent: the complement

 Subtract the net decimal equivalent (0.504) from “1” to

 Find the cash discount for an invoice dated

 What if the bill is paid on November 30?

 To calculate the exact number of days for a cash

 There are two tips in the text to help you.

 September 12 (2% discount) = $1,223.04

 An exception occurs when the invoice is dated

 Judy’s Fine Jewelry received an invoice for 50

 FOB destination: “free on board” at the

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