CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Mehta Traders has a sanctioned cash credit limit of ₹10,00,000 at 12% p.a. A commitment charge of 1% p.a. is levied on the unutilised portion of the limit. Average utilisation during the year is ₹7,00,000. What is the total annual cost (interest plus commitment charge) of the facility?
The total cost is ₹87,000. Interest at 12% on the average utilised ₹7,00,000 is ₹84,000, and the 1% commitment charge on the unused ₹3,00,000 adds ₹3,000. Interest on the full limit would be wrong because interest applies only to the amount used.
- A₹84,000
- B₹87,000Correct
- C₹1,20,000
- D₹90,000
Explanation
Interest = 12% of ₹7,00,000 = ₹84,000. Unutilised portion = ₹3,00,000; commitment charge at 1% = ₹3,000. Total = ₹87,000. Option A ignores the commitment charge, and option C charges interest on the full limit.
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