Factoring Accounts Receivable. Grafton Corporation is considering factoring its accounts receivable. Its sales are $3,600,000, and accounts receivable turnover is two times. The factor requires: (1) an 18 percent reserve on accounts receivable; (2) a commission charge of 2.5 percent on average accounts receivable, payable when receivables are purchased; and (3) an interest charge of 19 percent on receivables after deducting the commission charge and reserve.
The interest charge reduces the advance.
Given the facts, answer the following questions: (a) What is the average accounts receivable? (b) How much will Grafton receive by factoring its accounts receivable? (c) What is the annual cost of the factoring arrangement? (d ) What is the effective annual cost of factoring?