Asked by Nevering Useage on Mar 10, 2024



As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the costs of credit from other sources.

Costly Component

Refers to an expensive part or element required in the production of a good or in the provision of a service.

  • Understand the principles guiding the use of trade credit and the evaluation of credit cost.

Verified Answer

Mikki Mahinay

Mar 10, 2024

Final Answer :
Explanation :
This is because using the free component of trade credit does not involve any interest cost, whereas the costly component involves interest cost. Therefore, if the cost of the costly component is lower than the cost of credit from other sources, it may be beneficial to use it. However, if the cost is higher, it may not be a cost-effective option.