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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, ownermanaged business in the information technology sector in
Johannesburg, South Africa. Osmosys credit sales for the year ended December amounted to
approximately R million, and average accounts receivable days were Sales are expected to increase by
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 parttime basis. Osmosys currently has one credit administrator.
The following information is available:
If Osmosys employs an experienced credit controller, the cost to the business will increase by R 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 R next year. It is anticipated that the
accounts receivable days can then be reduced to days.
A local factoring organisation has offered to factor Osmosys accounts receivable on the following terms:
An advance of 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
An annual administrationservice fee of of credit sales
Interest charge on advances of per annum
A credit protection charge of 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.
It is anticipated that Osmosys will take advantage of early settlement cash discount. The early settlement
cash discount is available on purchases amounting to of its credit sales. The supplier of Osmosys has
made available the following credit terms:
net
net
net
Current overdraft rates are per annum.
Assume that there are days in a year.
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 December as compared to employing a credit controller show ALL
calculations
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