Kanwai Fans produces 25,000 fans per day at a cost of $7.50 each ( materials and

Question

Kanwai Fans produces 25,000 fans per day at a cost of $7.50 each ( materials and labor). It takes the firm 12 days to convert raw materials into a fan and sell it.  Kanwai allows its customers 30 days in which to pay for the fans they purchase , and  the firm generally pays its suppliers in 20 days.  

A. What is the length of Kanwai's cash conversion cycle?

B. if Kanwai always produces and sells 25,000 fans per day, what amount of working capital must it finance?

C. By what amount could Kanwai reduce it's working capital financing needs if it was able to stretch its payables deferral period to 25 days?

Explanation / Answer

a. 12 + 30 = 42 days

b. 25000 * $7.50 = $187,500 * 42 = $7,875,000

c. $187,500 * (12+25) = $6,937,500 --> Reduced by $937,500

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