Cash conversion cycle Primrose Corp has $19 million of sales, $3 million of inve
ID: 2651082 • Letter: C
Question
Cash conversion cycle
Primrose Corp has $19 million of sales, $3 million of inventories, $2 million of receivables, and $3 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 7% rate. Assume 365 days in year for your calculations. Round intermediate steps to 2 decimal places.
What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places.
days
If Primrose could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places.
days
How much cash would be freed-up? Round your answer to the nearest cent.
$
By how much would pre-tax profits change? Round your answer to the nearest cent.
$
Cash conversion cycle
Primrose Corp has $19 million of sales, $3 million of inventories, $2 million of receivables, and $3 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 7% rate. Assume 365 days in year for your calculations. Round intermediate steps to 2 decimal places.
What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places.
days
If Primrose could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places.
days
How much cash would be freed-up? Round your answer to the nearest cent.
$
By how much would pre-tax profits change? Round your answer to the nearest cent.
$
Explanation / Answer
Sales = $19 million
Inventories = $3 million
Cost of goods sold = 0.7*19 = $13.3 million
Days inventory outstanding = (average inventory / cost of goods sold) * 365 days = 82.33 days
Receivables = $2 million
Days Sales Outstanding Calculation: 365 X (2 /19) = 38.42
Payables = $3 million
Days payable outstanding = (average accounts payable / cost of goods sold) * 365 days = (3/13.3) *365 = 82.33 days
Where: DIO represents days inventory outstanding, DSO represents days sales outstanding, DPO represents days payable outstanding
CCC = 38.42 days
We can lower its inventories and receivables by 9% each and increase its payables by 9%
New CCC = 74.92 + 34.96 – 89.74 = 20.14
Free up cash = 0.09*(3+2+3) = $0.72 million
Pretax profits would be affected by receivables and payables
Thus pre tax profit will increase by = 0.09*(2+3) = $0.45 million
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