- April 4, 2020 at 2:09 pm
Hi,I am studying with a class mate and we cannot agree on the following part of the question
“The factoring company would charge an annual fee of 1.6% of credit sales. The company would benefit from savings in administration costs of €48,000 per annum and a reduction in bad debts of 60%. The proposed factoring agreement is with recourse, which means that the company still bears the loss of bad debts from credit sales.”
It though there is a reduction in bad debts of 60%, the company would still have to buy them back from the factoring company, so I put them in as below. Was I wrong to do this.
Current Policy Total
Finance Cost €26,000,000 x 55/365 x 7.5% €293,836
Bad Debts €26,000,000 x 2.8% €728,000
Overall Cost of Current Policy €1,021,836
Proposed Factoring Policy Total
Annual Factor Fee €26,000,000 x 1.6% €416,000
[Trade Receiveables] €26,000,000 x 35/365 = €2,493,151
Finance Cost €2,493,151 x 90% x 12% €269,260
Finance Cost €2,493,151 x 10% x 7.5% € 18,699
Bed Debts with recourse as Haylie plc will still bear the
loss of bad debts from Credit Sale €728,000 €728,000
Less : Savings in Administration -€48,000
Overall Cost of Propsed Factoring Policy €1,383,959
Overall Cost of the Proposed Factoring €1,383,959
Less Overall Cost of Current Policy €1,021,836
Net Benefit/Disadvantage of Proposed Change in Policy -€362,123
Any help on this would be great. Thanks so much.
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