Hi John,
Hope you can help me.
A factor has offered to take over receivables ledger administration and debt collection for Joan Co for an annual fee of 0.5% of credit sales. A condition of the offer is that factor will advance 'Joan co' 80% of the face value of its receivables at an interest rate 1% above the current overdraft rate. Joan Co pays interest on its overdraft at an annual rate of 8%. The factor claims that it would reduce outstanding receivables by 30% and reduce administration expenses by 2% per year if it's offer we're accepted.
Other info:
Receivables $3,800,000
Revenue $ 15,600,000
Admin exp. $ 1,000,000
Required
Evaluate whether the factors offer is financially acceptable.
I would be very grateful if you could explain how to answer this question the way how you did in your lectures. I did understand everything then but now with more complex questions I seem to struggle a bit.
Thank you in advance
Ask the Tutor ACCA FM
Factor offer question
10y ago#1Costs p.a.:
Factors fee: 0.5% x 15,600,000 = 78,000
Factors interest: 9% x 80% x (70%x3,800,000) = 191,520
Total: 269,520
Benefits p.a.:
Admin 2% x 1,000,000 = 20,000
Interest saving: 8% x (3800000 - (20% x 70% x 3800000) = 261,440
Total: 281,440
Net benefit = 281440 - 269520 = 11,920
Hi John
Thank you for your reply.
However I was hoping for bit more 'wordy' explanation.
Would you be able to explain bit more, just so I could understand the logic behind interest calculation bit better and hopefully remember for future questions?
Regards
10y ago#3Sorry there were not more words, but all the words are in my lecture!!
With the factor the receivables are only 70% of 3.8M.
80% of this is advanced, and the interest is 1% more than the overdraft interest, so 9% is what they charge.
For the interest saving, the current receivables are 3.8M. The new receivables are 70% of 3.8M but since 80% is advanced, only 20% of this is left outstanding.
The interest saved is 8% of the difference.
Sign in to reply to this topic.