The requirement here was for candidates to calculate the net value in dollars of accepting an early settlement discount offered by a supplier.

Candidates had to calculate the purchase cost saving if the early settlement discount were accepted and the increase in finance cost due to paying the supplier 30 days earlier. The purchase cost saving was 1% of the purchase cost of meeting annual demand. The increase in the annual finance cost was 5% of the reduction in trade payables arising from reducing trade payables days from 60 days to 30 days.

Some candidates ran into difficulties because they included total purchase costs in a comparison of current and revised costs, but only incremental costs and benefits are relevant here, so there was no need to include total purchase costs.

Errors that were made included:

• Treating the reduction in trade payables as a benefit 
• Comparing annual benefit with monthly cost, and vice versa 
• Including only a benefit, or including only a cost 
• Calculating an annual percentage cost, when the question asked for net value in dollars.

Some candidates, having calculated net value of the early settlement discount, went on to discuss whether it should be accepted. No credit was given to such a discussion, however, as the question asked only for calculation.