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

Verma Industries has a cash credit limit of ₹50 lakh. During the year its average utilisation was ₹32 lakh. The bank charges interest at 10% p.a. on the amount utilised and a commitment charge of 1% p.a. on the unutilised portion of the limit. What is the total annual financing cost for the year?

The total cost is ₹3.38 lakh. Interest at 10% on the ₹32 lakh actually used is ₹3.20 lakh, and the commitment charge of 1% on the unused ₹18 lakh is ₹0.18 lakh. Adding the two gives ₹3.38 lakh for the year.

  1. A₹3.20 lakh
  2. B₹3.38 lakhCorrect
  3. C₹3.70 lakh
  4. D₹5.00 lakh

Explanation

Interest = 10% × 32 = ₹3.20 lakh. Unutilised limit = 50 − 32 = ₹18 lakh, so commitment charge = 1% × 18 = ₹0.18 lakh. Total = 3.20 + 0.18 = ₹3.38 lakh. ₹3.20 lakh omits the commitment charge. ₹3.70 lakh charges the commitment fee on the whole limit instead of the unutilised part. ₹5.00 lakh charges interest on the full limit.

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