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 R$5$ 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 R$120000$ 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$72000$ next year. It is anticipated that the accounts receivable days can then be reduced

to $40$ days.

$2.2.$ 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 $2\mathrm{.}3\%$ 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:

$2\mathrm{.}5/30$ net $60$

$2/35$ net $60$

$1\mathrm{.}5/40$ 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$).$