1. Maestro Inc. currently has S950,000 in accounts receivable, S645,700 in inven
ID: 2614247 • Letter: 1
Question
1. Maestro Inc. currently has S950,000 in accounts receivable, S645,700 in inventories and $925,000 in accounts payable on its balance sheet. The firm's production manager has determined that cost of goods sold account for 80% of the annual sales revenue produced, which are $5,725,000. Maestro's production manager has determined that through negotiations with its suppliers, the firm could reduce their cost of goods sold down to 70%, and thus reduce its cash conversion cycle time a. Calculate the CCC for Maestro Inc. before the reduction in COG sold b. What is the new CCC for Maestro Inc. after the reduction in COG sold? To enjoy this reduction in COG sold, Maestro's suppliers will require that Maestro pay them a bit more promptly. If Maestro begins paying its bills quicker and is able to reduce their PDP by 25 days, what will their payables balance be? c. 2. Puddy,Manufacturing sells on terms of 2/10, net 30. Total annual sales are S8,500,000, 40% of the customers pay on the 10th day and take discounts, 40% pay in 30 days and the remaining customers pay, on average, 50 days after their purchases. What is the Puddx'saccounts receivable balance? 3. Jiffy Park Inc. can buy its inventory from the following two suppliers both of which offer essentially the same pricing and quality. Their credit terms are as follows: Supplier A2/15, net 30 Supplier B3/15, net 20 Jiffy Park is frequently short on cash and is often unable to take advantage of prompt payment discounts. Calculate the nominal cost of trade credit for each supplier given that Jiffy Park will usually pay its suppliers in 40 daysExplanation / Answer
1. Maestro Inc. :
a. CCC: 38.31 days.
Cash Conversion Cycle ( CCC) = Operating Cycle - Payables Deferral Period
Operating Cycle = Inventory Conversion Period + Days Sales Outstanding
Inventory Conversion Period = ( 365 / Cost of Goods Sold) x Inventory = ( 365 / $ 4,580,000) x $ 645,700 = 51.46 days.
Days Sales Outstanding = ( 365 / Annual Sales) x Accounts Receivables = ( 365 / $ 5,725,000 ) x $ 950,000 = 60.57 days.
Payables Deferral Period = ( 365 / Cost of Goods Sold) x Accounts Payable = ( 365 / $ 4,580,000 ) x $ 925,000 = 73.72 days.
CCC = 51.46 days + 60.57 days - 73.72 days = 38.31 days.
b. New CCC : 35.13 days.
Inventory Conversion Period = ( 365 / $ 4,007,500) x $ 645,700 = 58.81 days.
Payables Deferral Period = ( 365 / $ 4,007,500) x $ 925,000 = 84.25 days.
CCC = 60.57 days + 58.81 days - 84.25 days = 35.13 days.
c. Accounts Payables balance : $ 650,533
New payables deferral period = 84.25 days - 25 days = 59.25 days.
Let the accounts payable balance be P.
59.25 = ( 365 / $ 4,007,500 ) x P
P = 59.25 x $ 4,007,500 / 365 = $ 650,533
3. Nominal cost of trade credit:
Supplier A : 2 % / ( 100 % - 2% ) x 360 / ( 30 - 15) = 2 / 98 x 24 = 0.4898 = 48.98 %
Supplier B : 3 % / ( 100 % - 3% ) x 360 / ( 20 - 15) = 2.2268 or 222.68 %
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