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 Year 2 Year 3 N$000 N$000 N$ 000

INVENTORY Raw materials 10,800 14,580 18,500

Work -in - progress 7,560 9,720 9,400

Finished goods 8,640 12,960 14,500

Purchases 66,800 91,260 94,480

Cost of goods sold 64,800 81,000 90, 000

Sales 86,400 108,000 119,000

Debtors 17,280 25,920 30,000

Trade Creditors 8,640 10,530 12,800

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).