Question

Mandaue Company, a furniture manufacturer, supplies its products to retail outlets in Metro Manila. It grants a 30-day credit term to these retail outlets. A large retailer, Apo Inc., purchases an average of Php 500,000 per week. The contribution margin on sales to Apo is 40%. Company’s sales agents are paid on commission basis at 6% of sales. Mandaue Company is experiencing liquidity problems lately. Thus, management is considering the following options to reduce its receivables: a. Factor its receivables from Apo Inc. at 3% per month. The financing company will grant a maximum amount of 70% of the face value of receivables. b. Require Apo Inc. to pay a down-payment equivalent to 50% of invoice price at order date with a sales discount on the invoice price of 6%.

Answer 1

a) Situation 1. Factoring

Cost of factoring
Particulars	Php
Sales per week to Apo Inc.	500,000.00
Sales per month to Apo Inc. (4*500000) (a)	2,000,000.00
Financing Company will grant (2000000*70%) (b)	1,400,000.00
Cost of factoring (a-b)	600,000.00

*Assumes 4 weeks in a month

*3% Interest benefit mentioned in question

b) Situation 2. Apo Inc. making down payment

Particulars	Php
Sales Per Month to Apo Inc. (500000*4)	2,000,000.00
Contribution @ 40% (2000000*.4)	800,000.00
Contrribution loss (=2000000*6%) (a)	120,000.00
Interest loss (50%*(2000000*3%) (b)	30,000.00
Total Loss (a+b)	150,000.00

It is better to choose second method