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Nexylexy $($Pty$)$ Ltd was incorporated a few years ago and supplies a portable pizza$-$ovens

to a wide range of customers. Growth in the first few years was above expectations but

has declined of late to below annual estimates. Consequently the company is

reconsidering some of its immediate operations for the year ended $31$ January $2024.$ The

reconsiderations mainly affect the budgeting process for the year ended $31$ January $2024.$

An extract from the profit and loss for the latest financial year is as follows:

Income statement for the year ended $31$ January $2023$ R$000$

Sales $-360000$ units $($net of $5\%$ commission$)210600$

Manufacturing costs: R$000$

Raw material $78750$

Wages $$ variable $63000$

Variable overheads $24750$

Fixed overheads $14400$

Less closing inventory $(90000$ units$)(33300)147600$

Gross profit $63000$

Administration expenses $16500$

Interest $12000$

Depreciation $13500$

Profit before tax R$21000$

The managing director of Nexylexy arranged for a strategic planning session and

requested you to attend. As part of your assignment you must present the benefits and

pitfalls of implementing a stricter or more relaxed credit policy to the meeting. Another

area that will be debated at the strategic session is the marketing strategy of the company.

In preparing for the meeting you acquired the following information:

The company intends to immediately replace all property, plant and equipment $($PPE$)$ and

determined its useful life as $8$ years. These assets will therefore be written off straight line

over $8$ years after which it will be replaced. The new equipment is newer technology that

significantly improves the quality of their final product and provides for shorter production

runs, increasing the output volumes. You determined that the expansion would require

an investment of R$8200000$ in PPE. The depreciation charge equals any tax allowances.

Inventory is valued on a first$-$in$,$ first$-$out basis. The inventory turnover figure dropped to

its current level $4$ times per year. Management are not unduly concerned about the slower

turnover as the sales team were complaining that customers had to wait long for orders

to be fulfilled.

All sales are currently on credit with no discounts on offer for early settlement. The credit

application process is stringent and only once did a client default on his account and the

account written off as bad debt. This happened $2$ years ago. About $40\%$ of the applicants

for credit are approved.

The marketing team will propose the following strategy to increase sales.

$$ Relax the approval terms to attract more clients. The proposal is to grant credit on a

$4/10$ net $60$ basis. This should increase sales by at least $20\%.$ The selling prices will

remain intact.

$$ The team anticipates that under the new terms, $70\%$ of current debtors will take the

discount and the balance will pay in $60$ days.

$$ Of the increased sales, $80\%$ of the debtors will take the discount and the balance will

pay within $80$ days.

$$ The debtors balance at $31$ January $2023$ amounted to R$20771500,$ which translates

to a debtors$$ collection period of $36$ days.

$$ Bad debts of $1,5\%$ of total sales are expected

Additional information:

$1.$ Long$-$term loans are currently available but available at $12\%($above current

borrowing rate of the company of $10\%).$ There was no change in long term liabilities.

The capital is repayable in $5$ years.

$2.$ The balance of creditors $($based solely on raw material credit purchases$)$ at

$31$ January $2023$ was R$11600000.$ The settlement of creditors policy will not be

affected.

$3.$ Inventory levels will have to increase by $15\%$ to facilitate the expected changes.

$4.$ For internal reporting Cost Volume Profit principals are applied.

$5.$ The company tax rate is $28\%.$

$6.$ There are $365$ days in the financial year and operations occur on an even monthly

basis.

$($d$)$ Calculate the budgeted net profit after tax for the year ended

$31$ January $2024$ assuming the proposals of the marketing team are

realized. You are not required to comply with any reporting standards, but all

workings must be shown. $20$

$($e$)$ Briefly discuss how implementation of the proposal should be financed. $7$

$($f$)$ Study the amounts provided in Appendix A and clearly state $($with supporting

reasons$)$ where you do and don$$t agree with the provisional calculations

provided. Make the necessary adjustments $($if any$)$ and perform the

additional calculations $($if any$)$ required to Appendix A in order to determine

the net present value of implementing the new policies, providing an

appropriate conclusion. Nexylexy$$s weighted average cost of capital is $19\%$

per annum. $9$

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