Osmoff systems ( Osmosys ) is a small, owner - managed business in the information technology sector
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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
Related Book For
Linear Algebra And Its Applications
ISBN: 9781292351216
6th Global Edition
Authors: David Lay, Steven Lay, Judi McDonald
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