Question 2 (12 Marks - 22 Minutes) Okahandja Novelty Limited (ONL) is a wholesale distributor of a variety of imported goods to a range of retail outlets. The company specialises in supplying ornaments, small works of art, high-value furnishing (rugs, etc) and other items that the chief buyer for the company feels would have a market. In seeking to improve working capital management, the financial controller has gathered the following information. The finance manager of ONL is working on ways to reduce the working capital funding requirement and is considering factoring in credit sales. The company's annual turnover is N$2,5 million of which 90% are credit sales. Bad debts are typically 3% of credit sales. The offer from the factor is conditional on the following. - The factor will take over the sales book of ONL completely. - 80% of the value of credit sales will be advanced immediately (as soon as sales are made to the customer) to ONL, the remaining 20% will be paid to the company one month later. The factor charges 15% per annum on credit sales for advancing funds in the manner suggested. The factor is normally able to reduce the receivables' collection period to one month. - The factor offers a "no recourse" facility whereby they take on the responsibility for dealing with bad debts. The factor is normally able to reduce bad debts to 2% of credit sales. - A charge for factoring services of 4% of credit sales will be made. - A once-off payment of N$25000 is payable to the factor. The salary of the Administration clerk of N$12500 will be saved under the proposals and overhead costs of the credit control department, amounting to N\$2 000 per annum, would have to be reallocated. ONL's costs of overdraft finance is 12% per annum. ONL pays its sales force on a commission-only basis. The cost of this is 5% of credit sales and is payable immediately after the sales are made. There is no intention to alter this arrangement under the factoring proposals. Required: 2.1 Calculate ONL's funding requirement for working capital measured in terms of months. (2 marks) 2.2 Evaluate the proposal to factor the sales book by comparing ONL's existing receivable collection costs with those that would result from using the factor (assuming that the factor can reduce the receivables collection period to one month.) (8 marks) 2.3 Highlight at least four benefits of factoring. (2 marks)