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7. Jiffy Park Corp. has annual sales of $50,736,000, an average inventory level

ID: 2614479 • Letter: 7

Question

7. Jiffy Park Corp. has annual sales of $50,736,000, an average inventory level of S15,010,000, and average accounts receivable of $10,010,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,950,000 and accounts receivable by $1,950,000. 7 points) a. What is Jiffy Park's cash conversion cycle (CCC) prior to the changes proposed'? b. What is Jiffy Park's CCC after implementing the suggested changes? c. What is the net change in Jiffy Park's CCC given what you just calculated above? d. Why is this significant?

Explanation / Answer

CCC = DIO + DSO – DPO

DIO                       = Average inventory/COGS per day

COGS per day       = 50736000/365*85% =118152   

DIO                       = 15010000/118152

                             = 127 days  

DSO                      = Average AR / Revenue per day

Revenue per day   = 50737000/365

                             = 139003

DSO                      = 10010000/139003

                             = 72 days

DPO                      = Average AP/COGS per day

Average AP           = 50736000*85%*30/365

                             =3544570

DPO                      =3544570/118152

                             = 30

CCC before changes       = 127+72-30 =169 days

Revised DSO                 = 8060000/139003

                                      = 58 days

Revised DIO                   = 13060000/118152

                                      = 111days

Revised DPO                  = 40 days

Revised CCC                  = 58+111-40 = 129 days

Net change in CCC is = 169-129 = 40 days

Due to proposed system, CCC is reduced by 40 days which is positive effect on cash flows of the business

Hence it is suggested to implement the same,

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