AID13081: A small firm has total credit sales of Rs 80 lakhs and its average collection period is 80 days. The past experience indicates that bad debt losses are around 1 percent of credit sales. The firm spends about Rs 120000 per annum on administering its credit sales; this cost includes salaries of one officer and two clerks who handle credit checking & collection. A factor is prepared to buy the firms receivables by charging 2 percent commission and interest at the rate of 18 percent after withholding 10 percent as reserve. What should the firm do

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Question: A small firm has total credit sales of Rs 80 lakhs and its average collection period is 80 days. The past experience indicates that bad debt losses are around 1 percent of credit sales. The firm spends about Rs 120000 per annum on administering its credit sales; this cost includes salaries of one officer and two clerks who handle credit checking & collection. A factor is prepared to buy the firms receivables by charging 2 percent commission and interest at the rate of 18 percent after withholding 10 percent as reserve. What should the firm do?

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