A firm has credit sales of ₹360 lakh and its average collection period is 30 days. The financial controller estimates that bad debt losses are around 2% of credit sales. The firm spends ₹1,40,000 annually on debtor's adm

Working Notes: Average level of receivables = ₹360 lakhs × 30/360 = ₹30 lakhs Factoring commission = 1% of ₹30,00,000 = ₹30,000 Reserve = 10% of ₹30,00,000 = ₹3,00,000 Total (i) = ₹3,30,000 Thus, the amount available for advance is: Average level of receivables = ₹30,00,000 Less: Total (i) from above = ₹3,30,000 (ii) Amount available for advance = ₹26,70,000 Less: Interest @ 15% p.a. for 30 days = ₹33,375 Net amount of advance available = ₹26,36,625 Evaluation of Factoring Proposal Particulars Amount in ₹ Amount in ₹ (A) Savings (Benefit) to the firm Cost of credit administration 1,40,000 Cost of bad debt losses 2% of 360 Lakhs 7,20,000 Total annual savings 8,60,000 (B) Cost to the firm Factoring Commission [Annual Credit Sales x % of Commission (or calculated annually)] 30,000 × 360/30 3,60,000 Interest charges 33,375 × 360/30 4,00,500 Total annual cost 7,60,500 Net annual Benefit to the firm (A-B) 99,500 Since the savings to the firm exceed the cost to the firm on account of factoring, therefore, the proposal is acceptable.