VIPSolutions3 . 1 Bull Brand L t d has annual, non - seasonal credit sales o f R 2 6 0 0 0 0 0 . Customers are expected t o pay within 3 0 days, but i n fact have been settling i n a n average o f 4 2 days. Bull Brand L t d experiences a bad - debt rate 0 . 8 % o f debtors annually. The company's current overdraft facility i s 2 . 5 % above base - rate, which i s a t present 1 2 % . Unfortunately, the overdraft l i m i t has nearly been reached, and i s unlikely t o b e extended. Bull Brand L t d has contacted Buck L t d , a factoring firm, and has been quoted: a 1 . 8 % o f credit sales ( B u l l Brand estimates that this would save R 2 0 0 0 0 administration costs per year ) b 7 5 % o f invoices a t 3 % over base - rate. 3 . 1 . 1 Should Buck's terms b e agreed t o ? ( S u p p o r t your answer with calculations ) .
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3 . 1 Bull Brand L t d has annual, non - seasonal credit sales o f R 2 6 0 0 0 0 0 . Customers are expected t o pay within 3 0 days, but i n fact have been settling i n a n average o f 4 2 days. Bull Brand L t d experiences a bad - debt rate 0 . 8 % o f debtors annually. The company's current overdraft facility i s 2 . 5 % above base - rate, which i s a t present 1 2 % . Unfortunately, the overdraft l i m i t has nearly been reached, and i s unlikely t o b e extended. Bull Brand L t d has contacted Buck L t d , a factoring firm, and has been quoted: a 1 . 8 % o f credit sales ( B u l l Brand estimates that this would save R 2 0 0 0 0 administration costs per year ) b 7 5 % o f invoices a t 3 % over base - rate. 3 . 1 . 1 Should Buck's terms b e agreed t o ? ( S u p p o r t your answer with calculations ) .
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Asked by: REDDY BHARGAVA SURYA TEJA
Created at: 2025-11-03 14:26:56
Asked by: REDDY BHARGAVA SURYA TEJA
Created at: 2025-11-03 14:26:56
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# Factoring Decision Analysis: Bull Brand Ltd
Bull Brand Ltd is considering a factoring agreement with Buck Ltd. Below is a structured analysis to determine if the proposed terms should be accepted.
---
## **1. Key Facts**
- **Annual credit sales:** R2,600,000
- **Current collection period 42 days (vs. 30-day terms)
- **Bad debt rate:** .8% of debtors per year
- **Overdraft interest:** 2.5% above base; current base rate = 12%, so total = 14.5%
- **Near overdraft limit**
- **Factoring quote from Buck Ltd:**
- **Service fee:** 1.8% of credit sales
- **Advance:** 75% of invoice value at 3% above base (15% p.a.)
- **Estimated admin saving:** R20,000 per year
---
## **2. Current Costs Analysis**
### **2.1. Opportunity Cost of Funds**
- **Average Debtors = (Annual Credit Sales × Collection Period) / 365**
\[
\text{Average Debtors} = \frac{2,600,000 \times 42}{365} = R299,726
\]
- **Cost of financing (overdraft):**
\[
R299,726 \times 14.5\% = R43,460
\]
### **2.2. Bad Debts**
- **Annual bad debts:**
\[
.8\% \times 2,600,000 = R20,800
\]
### **2.3. Administration Costs**
- **Annual admin costs:**
\[
R20,000
\]
(Assumed fully saved if factoring is accepted.)
### **2.4. **Total Current Annual Cost**
\[
\text{Total} = 43,460 + 20,800 + 20,000 = R84,260
\]
---
## **3. Factoring Costs Analysis**
### **3.1. Factoring Fee**
- **Fee:** 1.8% of sales
\[
1.8\% \times 2,600,000 = R46,800
\]
### **3.2. Interest on Advance**
**Advance = 75% of invoice value.**
**Factoring company charges 15% p.a. interest (3% above base).**
- **With factoring, assume customers pay in 30 days (as per credit terms).**
- **Average advance outstanding:**
\[
\text{Advance} = 75\% \times \frac{2,600,000 \times 30}{365} = .75 \times 213,699 = R160,274
\]
- **Interest cost:**
\[
R160,274 \times 15\% = R24,041
\]
### **3.3. Administration Savings**
- **Administration costs saved:** R20,000
### **3.4. Bad Debt Savings**
- **Assume factoring is non-recourse (factoring company bears risk, so Bull Brand saves bad debts):**
\[
\text{Saved bad debts} = R20,800
\]
---
## **4. Net Cost Comparison Table**
| Item | Current Situation | With Factoring | Difference |
|----------------------------|------------------|---------------|--------------|
| Financing Cost | R43,460 | R24,041 | -R19,419 |
| Factoring Fee | R | R46,800 | +R46,800 |
| Administration Cost | R20,000 | R | -R20,000 |
| Bad Debts | R20,800 | R | -R20,800 |
| **Total Annual Cost** | **R84,260** | **R70,841** | **-R13,419** |
> **Calculation for factoring total:**
> \(24,041 + 46,800 = 70,841\)
---
## **5. Conclusion**
**By accepting Buck Ltd's factoring terms, Bull Brand Ltd would save approximately R13,419 per year compared to its current situation.**
---
## **6. Recommendation**
**Bull Brand Ltd should accept Buck Ltd's factoring offer**, as it will reduce annual costs and alleviate pressure on the overdraft facility.
---
## **Assumptions**
- Factoring is non-recourse (no bad debt risk for Bull Brand Ltd).
- All customers pay within 30 days under factoring.
- All administration costs are eliminated by factoring.
---
### 
*Alt text: Diagram showing the steps in a factoring process: seller, factor, and buyer interactions*
---
**If any assumptions change (e.g., recourse factoring), recalculate accordingly.**
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