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Hello!
I am having some problems with the finance saving on reduced receivables.
Here’s what I did….Existing situation:
Receivables days= 60 days (3500/21,300 * 365)
Receivables= $3,501,370 (60/365 * $21,300)
Annual finance cost= $245,096 ($3,501,370 * 7%)Revised situation:
Receivables days= 35 days
Receivables= $2,042,466 (35/365 * $21,300)
Annual finance cost= $175,652 ($2,042,466 * 80% * 9%) + ($2,042,466 * 20% * 7%)Annual finance saving= $69,444 ($245,096 – $175,652)
BENEFITS
– Bad debts saved $63,900
– Admin savings $40,000
– Finance saving $69,444COSTS
– Factor’s fees $159,750Net benefit of $13,594.
The examiner’s answer was $13,497.
Where did I go wrong?COSTS
The difference is due to the fact that you have taken current receivables as 3501370 when they are actually 3500000 !!!
If you use the correct current receivables figure then you end up with exactly the same answer as the examiner.
(Although don’t worry about exact figures – it is the approach that gets the marks, not the final answer.)
It is better when determining the existing receivables balance to just use the receivables balance on the balance sheet given for evaluating a factor and a settlement discount?
I notice I am only having the problem with the existing situation part. Everything else is fine.
But you used the figure from the balance sheet to get the 60 days, and then used the 60 days to get the receivables. However because of rounding you ended up getting a different figure!!!
🙂
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