Cash Disbursements Budget The Ajax Company budgets the following purchases of direct materi- als for the first quarter of the year:
January
February
March
Budgeted purchases
$100,000
$120,000
$110,000
All purchases of direct materials are made on credit. On average, the company pays 75 percent of its purchases in the month of sales, and the remainder in the following month.
Required
For the months of February and March, what are the estimated cash payments for purchases of direct materials under the assumption that there is no (cash) discount for early payment?
For the months of February and March, what are the estimated cash payments for purchases of direct material under the assumption that the purchase terms are 2/10, net 30? The company’s policy is to take advantage of all cash discounts for early payment.
Provide an economic argument as to why it is good (economic) policy to take advantage of early pay- ment discounts, as in (2) above.