Factoring. The Jackson Company has been negotiating with the Wright Bank with the hope of finding a cheaper source of funds than their current factoring arrangements. Forecasts indicate that, on...

Factoring. The Jackson Company has been negotiating with the Wright Bank with the hope of finding a cheaper source of funds than their current factoring arrangements. Forecasts indicate that, on average, they will need to borrow $180,000 per month this year–which is approximately 30 percent more than they have been borrowing on their receivables during the past year. Sales are expected to average $900,000 per month, of which 70 percent are on credit.

                As an alternative to the present arrangements, Wright Bank has offered to lend the company up to 75 percent of the face value of the receivables shown on the schedule of accounts. The bank would charge 15 percent per annum interest plus a 2 percent processing charge per dollar of receivables assigned to support the loans. Jackson Company extends terms of net 30 days, and all customers who pay their bills do so by the 30th of the month.

The company’s present factoring arrangement costs them a 21 2 percent factor fee plus an additional 11 2 percent per month on advances up to 90 percent of the volume of credit sales. Jackson Company saves $2,500 per month that would be required to support a credit department and a 1 percent bad debt expense on credit sales.

(a) Calculate the expected monthly cost of the bank financing proposal. (b) Calculate the expected monthly cost of factoring (c) Discuss three advantages of factoring. (d ) Discuss three disadvantages of factoring (e) Would you recommend that the firm discontinue or reduce its factoring arrangement in favor of Wright Bank’s financing plan? Explain your answer. (CMA, adapted.)