ebo Lamps Ltd has annual, non-seasonal credit sales of R3 200 000. Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Lebo lamps experiences a bad-debt rate of 0.8% of debtors annually. The company's current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Lebo lamps Ltd has contacted MBD Ltd, a factoring firm, and has been quoted: A factor charge of 1.8% of credit sales (Lebo lamps Ltd estimates that this would save R25 000 administration costs per year) An advance of 75% of invoices at 3% over base-rate. Should the factoring firm MBD Ltd terms be agreed to?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Lebo Lamps Ltd has annual, non-seasonal credit sales of R3 200 000. Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Lebo lamps experiences a bad-debt rate of 0.8% of debtors annually. The company's current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Lebo lamps Ltd has contacted MBD Ltd, a factoring firm, and has been quoted:
A factor charge of 1.8% of credit sales (Lebo lamps Ltd estimates that this would save R25 000 administration costs per year)
An advance of 75% of invoices at 3% over base-rate.
Should the factoring firm MBD Ltd terms be agreed to?
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