Ward - Finance - Solutions - Ch 04

Ward Finance- - FINANCE THEORY AND PRACTICE(SOLUTIONS MANUAL CHAPTER 4 Solution 1(a Area 1 Area 2 Existing Approach Number of customers Average

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FINANCE: THEORY AND PRACTICE (SOLUTIONS MANUAL) CHAPTER 4 6 Solution 1. TIGA SALES Ltd. (a) Area 1 Area 2 Overseas Total Existing Approach Number of customers 10,000 30,000 17,000 Average balance – €/£ 500 300 600 Average outstanding balance per group – €/£’000 5,000 9,000 10,200 Collection costs as a proportion of the outstanding balance 0.00 0.08 0.10 Bad debts as a proportion of sales 0.00 0.18 0.22 Selling cost as a proportion of sales 0.02 0.06 0.08 /£’000 /£’000 /£’000 /£’000 Sales 80,000 70,000 60,000 210,000 Contribution (25%) 20,000 17,500 15,000 52,500 Collection costs 0 (720) (1,020) (1,740) Bad debts 0 (12,600) (13,200) (25,800) Selling costs (1,600) (4,200) (4,800) (10,600) Total costs excluding financing (1,600) (17,520) (19,020) (38,140) Financing costs (350) (630) (714) (1,694) Total costs (1,950) (18,150) (19,734) (39,834) Contribution (net of costs) 18,050 (650) (4,734) 12,666 Area 1 Area 2 Overseas Total With factoring arrangement Bad debts as a proportion of sales 0.00 0.08 0.10 Selling cost as a proportion of sales 0.02 0.06 0.08 /£’000 /£’000 /£’000 €/£’000 Sales 80,000 70,000 40,000 190,000 Contribution (25%) 20,000 17,500 10,000 47,500 Bad debts 0 (5,600) (4,000) (9,600) Selling costs (1,600) (4,200) (3,200) (9,000) Total costs excluding financing (1,600) (9,800) (7,200) (18,600) Financing costs (400) (720) (544) (1,664) Total costs including financing (2,000) (10,520) (7,744) (20,264) Contribution (net of costs) 18,000 6,980 2,256 27,236 Administration fee (3,500) Net contribution 23,736 Benefit of using factoring 11,070
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FINANCE: THEORY AND PRACTICE (SOLUTIONS MANUAL) CHAPTER 4 7 b) To: Credit Controller Date: 21 st June, 2006 Re: Proposal to use debt-factoring services of DOMBA Ltd. The review carried out by the Credit Control Department has highlighted two areas of interest. Firstly, sales to Area 2 and overseas are contributing a net loss of over €/£5m. If we cannot improve this situation (with or without the assistance of DOMBA Ltd.), then we should consider pulling out of these markets. Secondly, using the information provided by DOMBA Ltd., the estimated net benefit to TIGA Ltd. of using debt factoring is €/£11.07m. This saving is to be achieved by a dramatic reduction in bad debts, offset slightly by lower overseas sales, higher finance costs and an administration fee of €/£3.5m. Based on the figures provided, DOMBA Ltd’s proposal appears attractive. If we feel that we are unable to introduce the improved credit control and stricter guidelines for sales ourselves (and thus avoid the administration fee from DOMBA Ltd), and if we can be sure that DOMBA Ltd’s projections are reliable, then I would recommend that we should pursue the proposal further. (c)
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This note was uploaded on 11/11/2010 for the course ACCOUNTING ac3211 taught by Professor Johngreen during the Winter '10 term at DIT Ireland.

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Ward Finance- - FINANCE THEORY AND PRACTICE(SOLUTIONS MANUAL CHAPTER 4 Solution 1(a Area 1 Area 2 Existing Approach Number of customers Average

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