During material procurement, a vendor offers a 2/10 net 30 payment term. If an invoice is $50,000, what is the savings if the early payment discount is taken?
Correct Answer
D) $1,000
A 2/10 net 30 term means a 2% discount is available if paid within 10 days. The savings would be $50,000 × 2% = $1,000 if the invoice is paid within the discount period.
Why This Is the Correct Answer
The payment term '2/10 net 30' is a standard trade credit format where the first number (2) represents the discount percentage, the second number (10) represents the days within which payment must be made to receive the discount, and 'net 30' means the full amount is due within 30 days. To calculate the savings, you multiply the invoice amount by the discount percentage: $50,000 × 0.02 = $1,000. This discount is only available if payment is made within the 10-day period.
Why the Other Options Are Wrong
Option A: $1,500
$500 represents only a 1% discount calculation ($50,000 × 1% = $500). This incorrectly applies half the stated discount rate. The term clearly specifies 2%, not 1%, so this calculation is mathematically incorrect for the given payment terms.
Option C: $2,000
$1,500 represents a 3% discount calculation ($50,000 × 3% = $1,500). This incorrectly applies a higher discount rate than specified. The payment term clearly states 2%, not 3%, making this calculation mathematically incorrect for the given scenario.
Memory Technique
Remember 'First number = discount percent' - in '2/10 net 30', the '2' means 2% off, '10' means you have 10 days to pay, and 'net 30' means full payment due in 30 days if you miss the discount.
Reference Hint
Look up 'Trade Credit Terms' or 'Payment Terms' in business finance sections, or 'Cash Management' chapters in construction business management references.
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