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Good day, Sir Moffat
Can you please help me with this question.
ANJO CO
Receivables ($000): 3,800
Sales ($000): 15,600A factor has offered to take over sales ledger administration and debt collection for an annual fee of 0.5% of credit sales. A condition of the offer is that the factor will advance Anjo Inc 80% of the face value of its receivables at an interest rate 1% above the current overdraft rate. The factor claims that it would reduce outstanding receivables by 30% and reduce administration expenses by 2% per year if its offer were accepted. Anjo Co pays interest on its overdraft at an annual rate of 8%.
My problem is the solution, the interest in advance:
2,600 x 80% x 1% = (21.3)Why do we put in 1% instead of 9%, it says 1% above the current overdraft rate. Can you please explain this part, Sir.
Thank you in advance, God bless.
The solution you have is simply looking at the extra interest cost (they are paying the factor interest of 9% to get money earlier, but saving overdraft interest of 8% as a result).
If you have watched my free lectures on this, then you will know that I prefer to show the full 9% as an extra cost, and the full 8% as a saving.
However, whichever way you show your workings, the overall saving or extra cost will be exactly the same. It doesn’t matter how you set out your workings.
Administration expenses ($000): 1000
So what I would do is:
Savings
1140 x 8% (Saved overdraft) = 91.2Cost
2600 x 9% (Extra cost) = 234Is this correct?
If you could do the entire solution here, that would be much appreciated as well, sir.I am sorry, but we really do not have the time to provide answers to questions that you have found elsewhere.
Also, you cannot have copied out the whole question – there is no mention of what the current admin expenses are, and also 2,600 x 80% x 1% is certainly not equal to 21.3 🙂If it is a past exam question, or is in the current edition of the BPP Revision Kit, then let me know which one.
I work through an example on factoring in my free lectures. In addition there are lectures working through several working capital past exam questions in our ‘revision kit live’ section (linked from the main F9 page).
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