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

Gupta Ltd has annual credit sales of ₹7,20,000 (360-day year). A factor will advance 80% of receivables, collecting in 30 days on average, and charge interest at 15% p.a. on the advance, plus a commission of 2% of receivables factored. Assume the factor advance is made on average receivables (sales x 30/360), and interest is charged for the full year on that advance. What is the total annual factoring cost (interest plus commission on annual sales)?

The total annual factoring cost is ₹21,600. Average receivables are ₹60,000, the 80% advance is ₹48,000 and interest at 15% is ₹7,200. Commission of 2% on annual sales of ₹7,20,000 is ₹14,400. Adding the two gives ₹21,600.

  1. A₹23,400Correct
  2. B₹16,200
  3. C₹21,600
  4. D₹14,400

Explanation

Average receivables = 7,20,000 x 30/360 = ₹60,000. Advance = 80% = ₹48,000; interest at 15% = ₹7,200. Commission = 2% of 7,20,000 = ₹14,400. Total = 7,200 + 14,400 = ₹21,600. Check: that matches 21,600, so the option 23,400 is wrong; the correct figure is ₹21,600.

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