6000000 4800000 400000 Alternative 1: Factoring: Calculation of Effective Cost of Factoring: Sale for the year Credit sales Receivables - (4800000 / 12) x 1 month Cost of factoring: (Per month) Fee (interest) 400000 x 90 %x2% Commission 400000 x 4% Cost per month Savings: Management cost (21600/12) Bad debts (400000 x 1%) 7200 16000 23200 (1800) (4000) 17400 u 26 Alternative 2: Bill Discounting: Cost of Bill Discounting Average debtors - 400000p.m Processing Fee (400000 X 2 %) 8.000 Interest / Discount (400000@90% x 18% x (1/12)] 5.400 Loss due to bad debts p. 4000 Administration cost 1800 19200 Company may Opt Factoring but not Bal discounting. Illustration 6 Star Limited manufacturers of Colour TV Sets, are considering the liberalization of existing credit terms to three of their large customers A, B and C. the credit period and likely quantity of TV sets that will be lifted by the customers are as follows: Credit period (Days) A B 0 1,000 30 1.000 1.000 1,000 1,000 1,500 2.000 80 1,000 90 2.500 1,500 The selling price per TV set is Rs. 9.000. The expected contribution is 20% of the selling price. The cost of carting debtors averages 20% per annum You are required: (a) Determine the credit period to be allowed to each customer. (Assume 360 days in a year for calculation purposes). (b) What other problems the company might face in allowing the credit period as determined in (a) above