QUESTION 32

Sales 16,000,000 Current receivables 3,300,000

Receivables 3,300,000 75 days Revised receivables 1972603
Changes in receivables 1,327,397
(a)(i) FACTOR 1 $
Factoring finance cost 8% 106191.781

Factor service charge 1.75%*16 mil 280000

Adminstrative savings -100,000
286191.781

Current situation
Finance cost 263014

(a)(ii) FACTOR 2 $
Debt factoring fees 3300,000*80%*10% 264000 1
Overdraft financing 3300,000*20%*8% 52800 2
Factoring fees-maintain the sales ledger-1% *16mil 160000 1
Adminstrative savings -100,000

Total cost 376800

Net cost= -113786

(b) Comment on any additional factors that must be considered when

(i) Factoring
Factoring is the company sold the receivable to the factoring company and receive the money in advance. Theref
company is needed to pay the debt factoring service charge as they help to manage our sales ledger but at the sam
The company would also loss the control of the sales ledger.
Besides that, The interest would be charged on the amount advanced, this is a cost to a company too.
The company also can improve its liquidity as it could easily obtain the funds.
Thus, the company should considered whether it is cost beneficial for the company. The benefits must be outweig

(ii) Offer early settlement discount

The early settlement discount is counted as an expenses for the company. This will decrease the company's profit
Moreover, The customer may choose not to take up the early settlement discount to pay out their debts. The comp
find alternatives to get the souce of funds with the bank and the interest on the overdraft would be high.
 1

he money in advance. Therefore, the

our sales ledger but at the same time

o a company too.

The benefits must be outweights than the costs. 2

decrease the company's profit.

pay out their debts. The company should
draft would be high.