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Mugere Ltd. is a small electronics company with annual credit sales of Sh.120 million. Recently, the company has witnessed increased difficulties in its credit control
Mugere Ltd. is a small electronics company with annual credit sales of Sh.120 million. Recently, the company has witnessed increased difficulties in its credit control department. The average collection period for debtors has risen to 60 days even though the stated policy of the business is payment within 40 days. Moreover, 2% of sales are annually written off as bad debts. Mugere Ltd. has entered into negotiations with a factor who is prepared to make an advance to the company equivalent to 80% of trade debtors, based on the assumption that in the future, customers will adhere to the 40-day payment period. The interest rate for the advance will be 12% per annum. Trade debtors are currently financed at a rate of 14 % per annum through bank overdraft. The factor will take over the credit control procedures of the company. This will not only lead to an annual saving of Sh.250,000 but will also eliminate all bad debts. The factor will however, make a charge of 4% of sales revenue for the provision of this service Required Advise Mugere Ltd. on whether to factor its trade debtors
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