CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital
A bank sanctions a cash credit limit of Rs 10,00,000 to Sharma Traders at 12% p.a. on the amount drawn, with a commitment charge of 1% p.a. on the unutilised portion. Average utilisation during the year is Rs 6,00,000. What is the total annual financing cost?
The total cost is Rs 76,000. Interest at 12% on the average drawn Rs 6,00,000 is Rs 72,000, and the 1% commitment charge on the unused Rs 4,00,000 adds Rs 4,000. Interest is charged only on the amount used.
- ARs 72,000
- BRs 76,000Correct
- CRs 82,000
- DRs 1,20,000
Explanation
Interest = 12% x 6,00,000 = 72,000. Unutilised = 4,00,000; commitment charge = 1% x 4,00,000 = 4,000. Total = 76,000. Rs 72,000 omits the commitment charge. Rs 82,000 charges 1% on the full limit (10,000). Rs 1,20,000 charges interest on the full limit.
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