Question 2 (25 marks) The sales director of Omaruru Ltd estimated that if the period of credit allowed to customers were reduced to 55 days, this would result in a 20% reduction in sales but would probably eliminate about N$ 3 million bad debts per annum. It would be necessary to spend an additional N$1 million per annum on credit control. The company at present relies heavily on overdraft finance, costing 12% per annum. The following is an extract from its financial statement for the last three years: Year 1 N$000 10,800 7,560 Year 2 N$000 14,580 9,720 Year 3 N$ 000 18,500 9,400 INVENTORY Raw materials Work-in- progress Finished goods 8,640 12,960 14,500 Purchases Cost of goods sold Sales Debtors Trade Creditors 66,800 64,800 86,400 17,280 8,640 91,260 81,000 108,000 25,920 10,530 94,480 90,000 119,000 30,000 12,800 Page 10 of 11 Required: a) Calculate the effects these changes. Base your calculations on the Year 3 level of sales, and assume that purchases and stockholdings would be reduced proportionally to the reduction in sales value. (23 marks) b) Advise the Sales Director whether the changes would be financially justified. (2 marks). Question 2 (25 marks) The sales director of Omaruru Ltd estimated that if the period of credit allowed to customers were reduced to 55 days, this would result in a 20% reduction in sales but would probably eliminate about N$ 3 million bad debts per annum. It would be necessary to spend an additional N$1 million per annum on credit control. The company at present relies heavily on overdraft finance, costing 12% per annum. The following is an extract from its financial statement for the last three years: Year 1 N$000 10,800 7,560 Year 2 N$000 14,580 9,720 Year 3 N$ 000 18,500 9,400 INVENTORY Raw materials Work-in- progress Finished goods 8,640 12,960 14,500 Purchases Cost of goods sold Sales Debtors Trade Creditors 66,800 64,800 86,400 17,280 8,640 91,260 81,000 108,000 25,920 10,530 94,480 90,000 119,000 30,000 12,800 Page 10 of 11 Required: a) Calculate the effects these changes. Base your calculations on the Year 3 level of sales, and assume that purchases and stockholdings would be reduced proportionally to the reduction in sales value. (23 marks) b) Advise the Sales Director whether the changes would be financially justified. (2 marks)