# 3.1.1 Should Buck’s Terms Be Agreed To? ## Summary **Yes, Bull Brand Ltd should accept Buck Ltd’s factoring terms.** --- ## Calculations and Justification ### 1. Current Credit Management Costs - **Average Debtors** \[ \frac{R2,600,000 \times 42}{365} = R299,726 \] - **Financing (Overdraft @ 14.5%)** \[ R299,726 \times 14.5\% = R43,460 \] - **Bad Debts (.8%)** \[ R2,600,000 \times .8\% = R20,800 \] - **Administration Costs** \[ R20,000 \] - **Total Current Cost** \[ R43,460 + R20,800 + R20,000 = \textbf{R84,260} \] --- ### 2. Factoring Costs - **Factoring Fee (1.8%)** \[ R2,600,000 \times 1.8\% = R46,800 \] - **Advance Amount (75% of 30-day Receivables):** - **Receivables (30 days):** \[ \frac{R2,600,000 \times 30}{365} = R213,699 \] - **Advance:** \[ 75\% \times R213,699 = R160,274 \] - **Interest on Advance (15%)** \[ R160,274 \times 15\% = R24,041 \] - **Admin Cost Savings:** \[ -R20,000 \] - **Bad Debt Savings:** \[ -R20,800 \] - **Net Factoring Cost:** \[ R46,800 + R24,041 - R20,000 - R20,800 = \textbf{R30,041} \] --- ### 3. Annual Cost Comparison | Item | Current System | With Factoring | Savings | |-----------------------|:--------------:|:--------------:|:---------:| | Total Annual Cost | R84,260 | R30,041 | R54,219 | --- ## Conclusion Factoring will save Bull Brand Ltd **R54,219 per year**, while also improving cash flow and eliminating the risk of bad debts. Therefore, **Buck Ltd’s terms should be accepted**. --- **Note:** Your original savings calculation was R13,419. Double-check if you intend to compare the factoring net cost (R30,041) to the current system (R84,260), which gives a difference of R54,219. If you include only interest savings, the lower figure may result, but standard analysis compares total costs. Adjust as needed for your context.