7. Jiffy Park Corp. has annual sales of $50,736,000, an average inventory level
ID: 2614479 • Letter: 7
Question
7. Jiffy Park Corp. has annual sales of $50,736,000, an average inventory level of S15,010,000, and average accounts receivable of $10,010,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,950,000 and accounts receivable by $1,950,000. 7 points) a. What is Jiffy Park's cash conversion cycle (CCC) prior to the changes proposed'? b. What is Jiffy Park's CCC after implementing the suggested changes? c. What is the net change in Jiffy Park's CCC given what you just calculated above? d. Why is this significant?Explanation / Answer
CCC = DIO + DSO – DPO
DIO = Average inventory/COGS per day
COGS per day = 50736000/365*85% =118152
DIO = 15010000/118152
= 127 days
DSO = Average AR / Revenue per day
Revenue per day = 50737000/365
= 139003
DSO = 10010000/139003
= 72 days
DPO = Average AP/COGS per day
Average AP = 50736000*85%*30/365
=3544570
DPO =3544570/118152
= 30
CCC before changes = 127+72-30 =169 days
Revised DSO = 8060000/139003
= 58 days
Revised DIO = 13060000/118152
= 111days
Revised DPO = 40 days
Revised CCC = 58+111-40 = 129 days
Net change in CCC is = 169-129 = 40 days
Due to proposed system, CCC is reduced by 40 days which is positive effect on cash flows of the business
Hence it is suggested to implement the same,
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.