Devine Co. is a firm that purchases and sells cement in Arusha. The company annual sales...

 

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Devine Co. is a firm that purchases and sells cement in Arusha. The company annual sales for the previous year was TZS. 7,000,000 of which 80% was credit sales. Due to collection problems experienced in previous years, the company has contracted Majembe Ltd, which is an experienced debt collection firm. Majembe Ltd. is willing to offer factor services with full payment of the total credit sales for a fee of 12% plus a commission of 4% on the total amount of the debts. The use of factoring services will lead the company to save TZS. 310,000 from bad debts. The finance manager of Devine Co. considers the factoring services to be unfavourable and has consulted LESHGO Bank which is ready to make an advance of the total credit sales at an interest rate of 10%. The bank requires a processing fee of 2% on the debts. Considering this option, Devine Co. will incur debt collection costs amounting to TZS. 230,000. REQUIRED: Advise the company whether to accept factoring services or the advance from (5 marks) the Bank? Justify your answer. Devine Co. is a firm that purchases and sells cement in Arusha. The company annual sales for the previous year was TZS. 7,000,000 of which 80% was credit sales. Due to collection problems experienced in previous years, the company has contracted Majembe Ltd, which is an experienced debt collection firm. Majembe Ltd. is willing to offer factor services with full payment of the total credit sales for a fee of 12% plus a commission of 4% on the total amount of the debts. The use of factoring services will lead the company to save TZS. 310,000 from bad debts. The finance manager of Devine Co. considers the factoring services to be unfavourable and has consulted LESHGO Bank which is ready to make an advance of the total credit sales at an interest rate of 10%. The bank requires a processing fee of 2% on the debts. Considering this option, Devine Co. will incur debt collection costs amounting to TZS. 230,000. REQUIRED: Advise the company whether to accept factoring services or the advance from (5 marks) the Bank? Justify your answer.

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