Cash conversion cycle Peppermint Patty has $13 million of sales $2 million of in
ID: 2673117 • Letter: C
Question
Cash conversion cyclePeppermint Patty has $13 million of sales
$2 million of inventories
$3 million of receivables
$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.
1. If Peppermint Patty 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
sales = 13,000,000
inventory = 2,000,000
a/r = 3,000,000
a/p = 2,000,000
CCC = inventory conversion period + average collection period - payable deferrals period
inventory conversion period = inventory/cost of goods sold per day
cost of goods sold per day = rate of sales (.75) * total sales (15,000,000) divided by days (365)
= 2000000/((.75)(15000000)/365)
=64.8888888 (repeating) days
average collection period = (a/r) / (sales/365)
average collection period = 3,000,000 / (15,000,000 / 365)
= 3,000,000 / 41095.89
= 73 days
payables deferral period = (a/p) / (cost of goods sold per day)
= 2,000,000 / ((.75)(15000000)/365)
= 64.888888 (repeating) days
If Peppermint Patty Corporation 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?
inventory = 2,000,000 * 0.91 = 1,820,000
a/r = 3,000,000 * 0.91 = 2,730,000
a/p = 2,000,000 * 1.09 = 2,180,000
now just recalc everything the same but with these new numbers:
inventory conversion period = 1,820,000/((.75)(15000000)/365) = 59.0488888 (repeating) days
average collection period = 2,730,000 / (15,000,000 / 365) = 66.43 days
payables deferral period = 2,180,000 / ((.75)(15000000)/365) = 70.72888 (repeating) days
NEW CCC = 59.04888 + 66.43 - 70.72888 = 54.75 DAYS
cash freed up:
inventory = (64.888 - 59.04888) = 5.84 days
5.84 * ((.75)(15000000)/365) = 180,000.00
receivables = (73 - 66.43) = 6.57 days
6.57 * (15,000,000 / 365) = 270,000
payables (remember since it increased to change the order that you subtract)
= 70.72888 - 64.888 = 5.84 days
5.84 * ((.75)(15000000)/365) = 180,000
cash freed up = 180,000 + 270,000 - 180,000 = $270,000
increase in pre tax profit: your new freed up cash less the bank rate:
270,000 * .92 = $248,400
good luck i hope this helps (:
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