PTD8 Flashcards
In addition to the information provided in each proposal, Onco has developed the following information:
Average credit sales per month = $400,000.
Onco will utilize the full amount of its average monthly credit sales to support its cash needs.
Average length of days accounts receivable are outstanding = 30 days.
Average bad debt expense as a percentage of credit sale = 2%.
Accounts receivable collection costs per month = $6,500.
Tab A Proposal Summary—Comco Bank
Summary of Short-Term Loan Terms Offered by Comco Commercial Bank
Comco proposes the following terms for a short-term loan that would be secured by Onco pledging its
accounts receivable as security:
1. Monthly maximum loan amount: 75% of Onco’s average accounts receivable.
2. Loan charges:
a. Administrative processing fee: 1% per month of loan amount.
b. Monthly interest charge: 2% per month of loan amount.
3. Onco will retain responsibility for collection of accounts receivable and for bad debt expense
incurred on the accounts used as security.
4. All fees and interest charges for a month are due at the end of each month
WHAT IS THE Monthly cost of Comco’s short-term loan proposal, including any cost or savings associated with the pledged accounts receivables
Monthly cost of Comco’s short-term loan proposal, including any cost or savings associated with the pledged accounts receivables $ 23,500
Explanation: Comco Commercial Bank
Maximum monthly dollar amount of loan = Average monthly accounts receivable × Percentage (75%) of accounts receivable to be loaned
Maximum monthly dollar amount of loan = $400,000 × .75 = $300,000
Monthly administrative processing fee = .01 × $300,000 = $3,000/month
Monthly interest charge = .02 × $300,000 = $6,000/month
Total monthly cost of short-term loan = $9,000/month
Monthly cost of bad debt expense = .02 × $400,000 $8,000/month
Monthly collection cost of accounts receivable $6,500/month
Total monthly cost of Comco’s short-term loan proposal, including cost associated with the pledged accounts receivables $23,500/month
In addition to the information provided in each proposal, Onco has developed the following information:
Average credit sales per month = $400,000.
Onco will utilize the full amount of its average monthly credit sales to support its cash needs.
Average length of days accounts receivable are outstanding = 30 days.
Average bad debt expense as a percentage of credit sale = 2%.
Accounts receivable collection costs per month = $6,500.
Tab B Proposal Summary—Factorco
Summary of Factoring Terms Offered by Factorco, Inc.
Factorco proposes the following terms for the monthly factoring of Onco’s accounts receivable:
1. Monthly maximum amount to be factored: 100% of Onco’s average accounts receivable.
2. Factoring interest charge: 5% monthly of amount factored.
3. Factorco will assume responsibility for the cost of collection of all accounts receivable.
4. Factorco will assume responsibility for bad debt expense related to the accounts purchased.
5. All finance charges for a month are due at the end of each month.
WHAT IS THE Monthly cost of Factorco’s factoring proposal, including any cost or savings associated with the factored accounts receivable
. Monthly cost of Factorco’s factoring proposal, including any cost or savings associated with the factored accounts receivable $ 5,500
Explanation: Factorco, Inc.
Maximum monthly dollar amount of accounts receivable purchased = Average monthly accounts receivable × Percentage (100%) of accounts receivable to be factored
Maximum monthly dollar amount to be factored = $400,000 × 1.00 = $400,000
Monthly factoring charge = .05 × $400,000 = $20,000/month
Less: Cost savings from:
Assumption of bad debt expense by factor = .02 × $400,000 = (8,000)/month
Assumption of collection of accounts receivable by factor = (6,500)/month
Monthly cost of Factorco’s factoring proposal, including savings associated with the factored accounts receivable =$5,500/month
In addition to the information provided in each proposal, Onco has developed the following information:
Average credit sales per month = $400,000.
Onco will utilize the full amount of its average monthly credit sales to support its cash needs.
Average length of days accounts receivable are outstanding = 30 days.
Average bad debt expense as a percentage of credit sale = 2%.
Accounts receivable collection costs per month = $6,500.
Tab C Proposal Summary—Quickcash
Summary of Factoring Terms Offered by Quickcash, Inc.
Quickcash has proposed the following terms for the factoring of Onco’s accounts receivable:
1. Monthly maximum amount to be factored: 80% of Onco’s average accounts receivable.
2. Factoring commission: 1% monthly of amount factored.
3. Factoring interest charge: 3% monthly on amount factored.
4. Quickcash will assume responsibility for cost of collection of all accounts receivable.
5. Onco will retain responsibility for cost of bad debt expense related to the accounts purchased.
6. All factoring commissions and factoring interest charges for a month are due at the end of each
month
WHAT IS THE Monthly cost of Quickcash’s factoring proposal, including any cost or savings associated with the factored accounts receivable
- Monthly cost of Quickcash’s factoring proposal $ 14,300
Explanation: Quickcash, Inc.
Maximum monthly dollar amount of accounts receivable purchased = Average monthly accounts receivable × Percentage (80%) of accounts receivable to be factored
Maximum monthly dollar amount to be factored = $400,000 × .80 = $320,000
Monthly factoring commission fee = .01 × $320,000 = $3,200/month
Monthly interest charge = .03 × $320,000 = 9,600/month
Monthly factor costs $12,800/month
Monthly cost of bad debt expense = .02 × $400,000 8,000/month
Less: Cost savings from:
Assumption of collection of accounts receivable by factor = (6,500)/month
Monthly cost of Quickcash’s factoring proposal, including cost and savings associated with the factored accounts receivable = $14,300/month
Based on your analysis, which proposal would you recommend that Onco choose?
The proposal from Factorco, Inc. provides the lowest cost of the three proposals
