Discussion Outback Sporting Goods Purchases Merchandise On T

Discussionoutback Sporting Goods Purchases Merchandise On Terms Of 41

Outback Sporting Goods purchases merchandise on terms of 4/10, n/60. The company has a line of credit that enables it to borrow money as needed from Northern Bank at an annual interest rate of 13 percent. Should Outback pay its suppliers within 10-day discount period if it must draw on its line of credit (borrow from Northern Bank) to make these early payments? Explain? Assignment Describe the operating cycle of a merchandising company. Compare and contrast the merchandising activities of a wholesaler and a retailer.

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Outback Sporting Goods operates within the dynamic environment of merchandising, where managing cash flows and optimizing the operating cycle are vital for maintaining profitability and operational efficiency. The specific purchase terms of 4/10, n/60 indicate a 4% discount available if payment is made within 10 days, with the net amount due within 60 days. Deciding whether to take advantage of this discount when borrowing from a bank at 13% annual interest involves a thorough comparison of costs and benefits, considering the company’s operating cycle and financing options.

The operating cycle of a merchandising company typically encompasses the period from the acquisition of inventory to the collection of cash from sales. It begins with purchasing inventory, followed by holding and managing stock, selling to customers, and finally collecting receivables. This cycle affects liquidity management and the timing of cash flows, which are critical in ensuring that the company can meet its obligations without excessive borrowing.

In the case of Outback Sporting Goods, taking the discount could result in significant savings, given that a 4% discount over a 10-day period equates to an effective annualized return of approximately 146%. This calculation is based on the formula for the annualized discount rate: (discount percentage / (100% - discount percentage)) (365 / days outstanding). Specifically, (4/96) (365/10) ≈ 1.0417 * 36.5 ≈ 38.05, which indicates a 38% equivalent annual rate, substantially higher than the 13% interest rate on bank borrowing.

However, if Outback must borrow from Northern Bank to make the early payment and thus pay interest at 13% annually, the economic benefit of taking the discount diminishes. Since the effective cost of borrowing from the bank is only 13%, which is significantly lower than the implied return from taking the discount, it would be more economical to pay within the full 60-day period without early payments unless cash flow constraints necessitate taking advantage of the discount.

Furthermore, whether Outback should prioritize early payments depends on its liquidity position. If the company maintains sufficient cash reserves, taking the discount can improve profit margins by reducing the cost of inventory purchases. Conversely, if cash is tight, borrowing from the bank at 13% may be a more viable option compared to the opportunity cost of losing the discount or delaying payments beyond the discount period.

Moving beyond payment decisions, understanding the operating cycle provides insight into the company’s overall cash management. The shorter the operating cycle, the faster a company can convert inventory and receivables into cash, which reduces the need for external financing. Merchandisers like wholesalers and retailers participate in similar cycles but differ in the scope and scale of their activities.

Wholesalers typically purchase large quantities of inventory from manufacturers and sell in bulk to retailers or other businesses, often with longer credit terms and larger transaction sizes. Retailers, on the other hand, purchase from wholesalers or directly from manufacturers and sell directly to consumers. Their operating cycles tend to be shorter, as they often operate in more rapid turnover environments, such as apparel, electronics, or groceries. Retailers focus heavily on inventory management and sales strategies to optimize their cash flow and profit margins.

Both types of merchandising activities share the key components of the operating cycle—inventory acquisition, sales, and receivables collection—but differ in their emphasis and scale. Wholesalers prioritize procurement efficiency and bulk transactions, while retailers focus more on inventory turnover rates and consumer demand responsiveness. These differences influence their financing needs, risk profiles, and strategies for managing working capital.

In conclusion, Outback Sporting Goods should carefully evaluate the cost-effectiveness of paying early and taking discounts, especially considering their ability to borrow at attractive rates. An understanding of the operating cycle and the distinct characteristics of wholesale and retail merchandising activities can further improve financial decision-making and operational efficiency, ensuring the company sustains competitive advantage and profitability.

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