M Co is considering using the service of a factor. Its annual sales are $5,000,000 with customers taking an average of 60 days to pay. The cost of financing these is currently $65,753 per annum.
The factor will advance 70% of M CO’s sales involve at a promotional rate of 8% of amounts advanced, the same rate that the company pays on its overdraft. In addition, the factor will reduce the average receivables period to 30 days. It will also take over the administration of the sales ledger, for which it will charge an annual fee of 1% of sales. What is the cost or benefit for employing the services of the factor compared continuing without the factor? Assumed 360 working days in a year . Which of the following are correct
(A) $17,124 cost
(B) $17,124 benefit
(C) $15753 benefit
(D) 15753 cost
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Debt factoring
2y ago#1Where is this question from?
I think it is
The admin fee is 1m * 5% = 50,000
The cost of receivables which is going to be 5m *30/365 * 8% = 32,877
Which equals 82,877 minus the cost now before the factor of 65,753
Equals a net cost of 17,124
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