Cooley Industries needs an additional $500,000, which it plans to obtain through a factoring arrangement. The factor would purchase Cooleys accounts receivables and advance the invoice amount, minus a 2 percent commission, on the invoices purchased each month. Cooley sells on terms of net 30 days. In addition, the factor charges a 12 percent annual interest rate on the total invoice amount, to be deducted in advance.

1a. Would it be to Cooleys advantage to offer to pay the factor a commission of 2.5 percent if it would lower the interest rate to 10.5 percent annually? (Assume the firm needs $500,000 and there is no reduction of monthly expenses and bad debt losses are not avoided)

1b. Assume a commission of 2 percent and an interest rate of 12 percent. What would be the total cost of the factoring arrangement if Cooleys funding needs rose to $650,000? Would the factoring arrangement be profitable under these circumstances? (Assume not reduction of monthly expenses and bad debt losses are not avoided)