MeMe Ltd. (MeMe) is a large clothing retailer with a 31 March-financial yearend and outlets nationwide. MeMe sells semi-formal fashionable clothing items for both men and women. The entitys main demography is between the ages of 20 45 years and presents the working to middle class.

Customers

Customers may purchase either on cash or credit. If customers opt to purchase on credit, a credit term of 2/20 net 60 is applicable. However, after MeMe recently analysed the past financial figures, it was noted that 8% of the customers who purchase on credit, never pay for their purchases. MeMe wishes to improve this outcome and, consequently, it has been proposed that the credit policy be amended.

Following are extracts from MeMes finalised 2023-financial statements:

Statement of Financial Position for the financial year ending 31 March 2023

	R
Trade receivables	3 800 000

Statement of Comprehensive Income for the financial year ending 31 March 2023

	R
Sales
Cash	47 000 000
Credit	29 000 000
Cost of sales	(48 500 000)

The proposed new credit policy is 5/20 net 30 and besides expecting to stimulate the sales of MeMe, it is expected to improve the bad debt percentage by 40%. One of the reasons being that the debtors who make use of the settlement discount will increase with 23% to 80%. As the debtors average outstanding days are shortened, it may compensate for the 31% opportunity cost of the working capital investment which has to be carried.

After the amendments to the credit policy have been implemented, the next financial years figures are expected to be the following:

Statement of Financial Position for the financial year ending 31 March 2024

	R
Trade receivables	2 350 000

Statement of Comprehensive Income for the financial year ending 31 March 2024

	R
Sales
Cash	47 000 000
Credit	31 000 000
Cost of sales	?

Suppliers

MeMe purchases 62% of the clothing items which the entity sells from local South African suppliers. To ensure that MeMe has availability to a variety of fashion trends as well as less expensive inventory, the remaining 38% of inventory is purchased from Chinese suppliers.

Financing activities

MeMes weighted average cost of capital is 12% while the entitys current liabilities has a cost of 11.6% per annum. Both will remain the same irrespective of whether the credit policy is amended or not. MeMe has an aggressive working capital policy.

Notes:

1. MeMe will apply the same cost-based percentage in the future as in the 2023- financial year, as part of the entitys pricing strategy.

2. Assume sales and cost of sales occur evenly throughout the financial year.

3. Should the credit policy not be amended, the credit sales will remain the same as in the 2023-financial year.

4. Assume that all costs relating to inventory will remain constant in the 2023 and 2024-financial year.

5. Should the credit policy be amended, it will be done from 1 April 2023.

6. Assume today is 1 April 2023.

7. Assume 365 days per year for all the applicable years.

8. Inflation may be ignored. 9. Income tax may be ignored.

REQUIRED:

Advise MeMe Ltd. whether or not the entity should amend its credit policy from a net cash flow perspective.

The following assumptions may be made for question 1.4 only:

The customers who purchase on credit, do so on the last day of each month.

Besides the customers who will make use of the settlement discount, credit customers pay on the last day which is allowed according to the respective policies.

For eases sake, payments from customers who utilise the settlement discount may be regarded as being received at the end of the month.

The variable costs amount to 59% of the sales amount for cash sales and 61% of the sales amount for credit sales.

All variable costs are incurred at the end of a month and paid for 2 months thereafter at the beginning of the relevant month.

Round to two decimal places where applicable. (32 marks)