Primrose Corp has $15 million of sales, $2 million ofinventories, $3 million of

Question

Primrose Corp has $15 million of sales, $2 million ofinventories, $3 million of receivables, and $1 million of payables.Its cost of goods sold is 80 percent of sales, and it financesworking capital with bank loans at an 8 percent rate. What isPrimrose’s cash conversions cycle(CCC)? If Primrose couldlower its inventories and recivables by 10 percent each andincrease its payable by 10 percent, all without affecting eithersales or cost of goods sold, what would the new CCC be, how muchcash would be freed up, and how would that affect pre-taxprofits?

Explanation / Answer

Sales = $15,000,000; Inventory = $2,000,000; A/R =$3,000,000; A/P = $1,000,000; COGS = 0.8(Sales); Interest on bank loan = 8%;CCC = ?

CCC= Inventory conversion period + Average collection period

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