Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Osmoff systems ( Osmosys ) is a small, owner - managed business in the information technology sector in Johannesburg, South Africa. Osmosys credit sales for

Osmoff systems (Osmosys) is a small, owner-managed business in the information technology sector in
Johannesburg, South Africa. Osmosys credit sales for the year ended 31 December 2021 amounted to
approximately R5 million, and average accounts receivable days were 60. Sales are expected to increase by 20%
over the next year. Because of the rapid expansion of its client base, there has been a steady deterioration in
accounts receivable collection and a rapid increase in its overdraft, despite high profits. After repeated concerns
raised about the Osmosys overdraft risks, the bank providing overdraft facility to the business has now refused
to extend the overdraft any further and has suggested that Osmosys factors its accounts receivable or employ an
experienced credit controller, on a part-time basis. Osmosys currently has one credit administrator.
The following information is available:
1. If Osmosys employs an experienced credit controller, the cost to the business will increase by R120000 per
annum. The credit administrator will continue in the current role, working with the credit controller and the
cost to Osmosys of the credit administrator is expected to be R72000 next year. It is anticipated that the
accounts receivable days can then be reduced to 40 days.
2. A local factoring organisation has offered to factor Osmosys accounts receivable on the following terms:
An advance of 80% of the value of sales invoices (which Osmosys would fully utilise). The remaining
value of the receivables will be financed with the overdraft facility.
An estimated reduction in accounts receivable days to 35
An annual administration/service fee of 2.3% of credit sales
Interest charge on advances of 12% per annum
A credit protection charge of 2% of credit sales
The factor will take over the credit management and the credit administration department at Osmosys
will be disbanded and the employees will be absorbed elsewhere within Osmosys.
3. It is anticipated that Osmosys will take advantage of early settlement cash discount. The early settlement
cash discount is available on purchases amounting to 40% of its credit sales. The supplier of Osmosys has
made available the following credit terms:
2.5/30 net 60
2/35 net 60
1.5/40 net 60
4. Current overdraft rates are 10% per annum.
5. Assume that there are 365 days in a year.
6. Assume that Osmosys credit sales and purchases occur close to each other.
Required:
By undertaking a detailed quantitative analysis, determine whether it is financially beneficial for Osmoff Systems to factor
its accounts receivables for the year ended 31 December 2022, as compared to employing a credit controller (show ALL
calculations).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Ethics

Authors: Ronald F. Duska, Brenda Shay Duska, Julie Anne Ragatz

2nd Edition

1405196130, 978-1405196130

More Books

Students also viewed these Accounting questions

Question

Summarize the ABCDE method for overcoming irrational beliefs.

Answered: 1 week ago