ACCA FM · Chapter 4 · Question 9 of 12
A company has annual credit sales of $7.3m and receivables of 70 days. A factor would reduce the collection period to 40 days for a fee of 1.5% of credit sales, and the company would save $90,000 a year in credit control costs. The company finances receivables with an overdraft costing 8% a year. The factor will not advance any finance. What is the annual net benefit or cost of using the factor (365-day year)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Net benefit of $28,500
Explanation
Reduction in receivables = $7,300,000 x (70 - 40) / 365 = $600,000. Overdraft interest saved = $600,000 x 8% = $48,000. Administration saving = $90,000. Factor fee = $7,300,000 x 1.5% = $109,500. Net benefit = $48,000 + $90,000 - $109,500 = $28,500 (all figures exact).
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