The total turnover of X Ltd. is ₹50 lakhs of which 72% is on credit. Debtors are allowed one month to clear off the dues. A factoring company is willing to advance 80% of the bill raised on credit for a fee of 2% a month

1. Calculate Annual Credit Sales: Annual Credit Sales = ₹50,00,000 x 72% = ₹36,00,000 2. Calculate Monthly Credit Sales: Monthly Credit Sales = ₹36,00,000 / 12 = ₹3,00,000 3. Cost of Factoring: Fee (2% per month on 80% advance) = (₹3,00,000 x 80%) x 2% = ₹2,40,000 x 0.02 = ₹4,800 Commission (10% on total debts) = ₹3,00,000 x 10% = ₹30,000 Total Factor Cost (A) = ₹4,800 + ₹30,000 = ₹34,800 4. Savings from Factoring: Annual Management Cost Savings = ₹48,000 Monthly Management Cost Savings = ₹48,000 / 12 = ₹4,000 Bad Debts Avoided (1% on credit sales) = ₹3,00,000 x 1% = ₹3,000 Total Savings (B) = ₹4,000 + ₹3,000 = ₹7,000 5. Net Cost of Factoring (per month): Net Cost of Factoring = Total Factor Cost (A) - Total Savings (B) = ₹34,800 - ₹7,000 = ₹27,800 6. Cost of Bank Advance: Interest (15% annual on 80% advance) = (₹3,00,000 x 80%) x 15% / 12 = ₹2,40,000 x 0.15 / 12 = ₹36,000 / 12 = ₹3,000 Processing Fee (2% on debts) = ₹3,00,000 x 2% = ₹6,000 Bad Debts (1% on debts, not avoided by bank) = ₹3,00,000 x 1% = ₹3,000 Management Cost (not saved by bank) = ₹4,000 Total Cost of Bank Advance (per month) = ₹3,000 + ₹6,000 + ₹3,000 + ₹4,000 = ₹16,000 Conclusion: Since the cost of Bank Finance (₹16,000 per month) is less than the net cost of factoring (₹27,800 per month), it is advisable to accept the bank offer.