The Bone Company has been factoring its accounts receivable for the past 5 years. The factor charges a fee of 2 percent and will lend up to 80 percent of the volume of receivables purchased for an additional 1.5 percent per month. The firm typically has sales of $500, 000 per month, 70 percent of which are on credit. By using the factor, two savings would be effected:
$2, 000 per month that would be required to support a credit department
A bad-debt expense of 1 percent on credit sales.