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Mistake made in this factoring problem,help me solve it ??

CA Final 521 views 1 replies

Hello Friends,

Doubt is on factoring problem No. 15 from CA final SFM Nov 2015 RTP.

The way I have solved is as follows:.

 a   annual sales ( given )               60,000,000
 b   annual commission                  1,200,000
 c   reserves                  5,880,000
   (a-b)*10/100   
 d   interest @ 16%                  8,467,200
   (a-b-c)*16/100   
 e   savings in bad debts                     840,000
   (60000000*1.75/100*80/100) 
 f   savings in admin cost                     600,000
 g   net cost of factoring                  8,227,200
   (b+d-e-f)   
 h   net amount received (a-b-c-d)               44,452,800
 i   annual cost (g/h) 18.51% p.a

Whereas RTP answered 14.77% p.a as annual cost.

Please point out the mistake I have commited in this problem, what is the logic behind the interest computed by RTP and why my interest is varying.??

Kindly reply me in lehmans language, with simple explanation.

 

Replies (1)

correct withholding amount is 10% of gross sales and not net of commission.

there is 90 days credit period hence interest will accrue only for 90 days equivalent outstanding and since it is average outstanding same amount will remain as advance with the company.

cost% will  be calculated on amount actually received and not on gross, because amount you advanced is for 90 days, and receivable are realised after 90 days so amt pending in cycle is amt for 90 days less 10% withholding for 90 days sales less commission for the 90 days sales.

Turnover a    60,000,000
Withhold b      6,000,000
Commission c      1,200,000
Interest e (a-b-c)*16% for 90 days      2,112,000
     
Saving            600,000
Bad debt            840,000
         1,440,000
     
Net cost        1,872,000
     
Proceeds received (a-b-c-d)*90/360    12,672,000
    14.77%


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