Question

Rajang Sdn Bhd makes annual credit sales of RM 2,000,000. Credit terms are 35
days, but its debt administration has been poor and the average collection period has
been 40 days with 0.5% of sales resulting in bad debts which are written off.

A factor would take on the task of debt administration and credit checking, at an
annual fee of 2.5% of credit sales. The company would save RM48,000 a year in
administration costs. The payment period would be 30 days.

The factor would also provide an advance of 80% of invoiced debts at an interest rate
of 14%.The company can obtain an overdraft facility to finance its accounts receivable
at a rate of 11%.

Should the factor’s service be accepted ? Assume a constant monthly revenue.