Cash conversion cycle Samual Corp has $13 million of sales, $2 million of invent

Question

Cash conversion cycle

Samual Corp has $13 million of sales, $2 million of inventories, $3 million of receivables, and $2 million of payables. Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations. Do not round intermediate steps.

1. If Samual 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

2. 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

1. CCC= INVENRTORY CONVERSION PERIOD +AVERAGE COLLECTION PERIOD – PPAYABLE DEFERRAL PERIOD

INVENRTORY CONVERSION PERIOD=INVENTORY /COST OF GOODS PER DAY

=2,000,000 /[(0.8 ) 13,000,000}] /365=70.19 DAYS

2. AVERAGE COLLECTION PERIOD =RECEIVABLE /(SALE/365)

=$3 million /(13/365)=84.23DAYS

3. PAYABALE DEFEREED PERIOD = PAYABLES / [COST OF GOODS SOLD /365]

= $2 million//[(0.8 ) 13,000,000}] /365=70.19

CCC=70.19 DAYS+84.23DAYS+70.19=224.61 DAYS ANSWER

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