INFORMATION

The credit terms of Umdloti Traders are currently 2/10 net 30. The selling price of the only product that it sells is R200 per unit and the variable costs are R112 per unit. The trader wants to determine the overall effect on the profit if it changes its credit terms, by increasing the settlement discount from 2% to 3%. The table below shows the current situation and the expected changes arising from the new credit terms:

Current: 2/10 net 30

Debtors collection period: 42 days

Credit sales: 22 000 units

Bad debts: 4% of sales

Percentage of customers who make use of the discount: 60%

Proposed: 3/10 net 30

Debtors collection period: 28 days

Credit sales: 26 400 units

Bad debts: 3% of sales

Percentage of customers who make use of the discount: 70%

Question: Use the information provided below to calculate the annual net cost of factoring to Westend Limited.

INFORMATION The current annual sales of Westend Limited are R2 000 000, of which 75% is on credit. The debtors represent an average of 45 days sales. Westend Limited is experiencing a cash flow problem and management is considering factoring the companys debtors. A factor, GH Financiers, has offered the following deal: Service charge of 4% of credit sales Finance charge of 16% of outstanding debtors Retention of 20% to be held by the factor 4% expected bad debts vested in GH Financiers.

The service agreement is expected to save Westend Limited costs amounting to R1 500 per month.