X Ltd. has average debtors of 90,00,000. The company's average collection period is 60 days. At present, it incurs credit administration expenses of…

(i) Working notes: Credit Sales = (90,00,000 × 360) / 60 = 5,40,00,000 Particulars ₹ A. Annual Savings (Benefit) on taking Factoring Service Cost of credit administration saved 4,00,000 Bad debts avoided (1% of 5,40,00,000) 5,40,000 Total 9,40,000 B. Annual Cost of Factoring to the Firm: Factoring Commission [2% x 5,40,00,000] 10,80,000 Interest Charged by Factor on advance (90,00,000 - 1,80,000 – 13,50,000) x 15% 11,20,500 Total 22,00,500 C. Net Cost of Factoring to the Firm: 12,60,500 Advance to be paid = (90,00,000 – 1,80,000 – 13,50,000) - (74,70,000 × 0.15 × 60 / 360 × 100) = 74,70,000 - 18,67,500 = 56,02,500 Rate of Effective Cost of Factoring to the Firm = (12,60,500 / 56,02,500) × 100 = 22.50% Rate of Effective Cost of Factoring to the Firm can also be calculated for advance without taking Interest into consideration: Rate of Effective Cost of Factoring to the Firm = 12,60,500 / (90,00,000 – 1,80,000 – 13,50,000) × 100 = 12,60,500 / 74,70,000 × 100 = 16.874% (ii) Advice: Since the cost to the firm exceeds the saving to the firm on account of factoring, therefore, the proposal should not be acceptable.