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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Anand Textiles has annual sales of ₹7,20,000 (360 days), all on credit. A factor will advance 80% of receivables, charging 12% p.a. interest on the advance and a 2% commission on receivables. Average collection period is 30 days. What is the total annual cost of factoring, taking average receivables as sales x 30/360 and charging interest on the advance for the year, with commission applied to the full annual sales?

Total annual factoring cost is ₹20,160. Commission is 2% of ₹7,20,000 sales, giving ₹14,400. Average receivables are ₹60,000, the advance is 80% of this, ₹48,000, and interest at 12% is ₹5,760. Adding both gives ₹20,160.

  1. A₹14,400 + ₹5,760 = ₹20,160Correct
  2. B₹14,400 + ₹4,800 = ₹19,200
  3. C₹5,760 + ₹14,400 = ₹20,160 only if commission is on advance, otherwise ₹19,200
  4. D₹1,200 + ₹14,400 = ₹15,600

Explanation

Commission = 2% x 7,20,000 = ₹14,400. Average receivables = 7,20,000 x 30/360 = ₹60,000. Advance = 80% = ₹48,000. Interest = 12% x 48,000 = ₹5,760. Total = ₹20,160. The ₹4,800 figure wrongly uses 100% of receivables at 8%; the ₹1,200 option misapplies the commission base.

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