Limpopo Trading Pty (Ltd) (hereafter referred to as "the company") is a company wholesales and distributes a variety of products ranging from plastic bags, groceries and electrical items. The company has warehouses at all former homelands and towns in Limpopo and has been in operation for more than 4 decades. Although the warehouses are only in Limpopo, South Africa, the company also supplies big and small retailers at majority of SADC countries.

Current credit policy.

Company's sales are R20 million per annum and all sales are on credit. The credit terms are 2/10 net 50. Presently, 50% of customers take discounts at 2% The bad debt losses are at 3% of sales for which discounts are not taken.

Proposed credit policy.

The company's head of finance is considering changing the credit policy. Total sales (still on credit) are expected to decrease by R2 million to R18 million. The proposed amended policy will have credit terms of 3/10 net 30. Under this policy, 60% of customers are expected to settle their accounts early thereby taking up the discount allowed. The bad debt losses are expected to be 2% of sales. The gross profit margin will remain unchanged at 25%. The cost of carrying debtors will increase by R125 000.

The company is also considering delaying payment to their major creditor, from whom they purchase under the terms 2/10 net 40, for an additional 20 days. Use 365 days in year when necessary. The company's management can be commended for its optimal management of inventory over the years.

REQUIRED:

2.1 Determine what effect will the proposed change in credit policy will have on the net profit. (17 marks)

2.2 Compute the cost of trade creditor finance for both the current and proposed agreement with the major creditor and advise if the considered/amended payment terms are worth pursuing. (6 marks)

2.3 List five (5) creditworthiness factors to consider before granting credit to a potential customer. (5 marks)

2.4 Discuss the costs which Limpopo Trading Pty (Ltd) might incur because of holding too low level of inventory. (6 marks)