In a discount warehouse a hi-fi music centre is proced at £256. The customer is entitled to a 10% discount, but he must pay 17.5% VAT.
Does it make any difference whether the discount is subtracted before or after adding the VAT?
Compare the two methods of approach:
- First subtracting the discount, then adding the VAT.
- First adding the VAT, then subtracting the discount.
Suppose the discount is subtracted first:
| |
Discount = 10% of £256 = |
|
× £256 = £25.60 |
This means that the discount price is
£256 - £25.60 = £230.40
Add the VAT
| |
VAT = 17.5% of £230.40 = |
|
× £230.40 = £40.32 |
The total price is therefore
£230.40 + £40.32 = £270.72
What happens if the VAT is added first?
| |
VAT = 17.5% of £256 = |
|
× £256 = £44.80 |
After adding the VAT the price is
£256 + £44.80 = £300.80
Subtract the discount
| |
Discount = 10% of £300.80 = |
|
× £300.80 = £30.08 |
The final price is therefore
£300.80 - £30.08 = £270.72
Both give the same answer!