Primrose Corp has $17 million of sales, $3 million of inventories, $4 million of
ID: 2645830 • Letter: P
Question
Primrose Corp has $17 million of sales, $3 million of inventories, $4 million of receivables, and $1 million of payables. Its cost of goods sold is 65% of sales, and it finances working capital with bank loans at an 9% rate. Assume 365 days in year for your calculations. Round intermediate steps to 2 decimal places.
a.) What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places.
days
b.)If Primrose could lower its inventories and receivables by 8% each and increaseits payables by 8%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places.
days
c.)How much cash would be freed-up? Round your answer to the nearest cent.
$
d.)By how much would pre-tax profits change? Round your answer to the nearest cent.
$
Explanation / Answer
a.) Calculate Cash Conversion Cycle
Sales = $17 million
Inventory = $3 million
Receivables = $4 million
Payables = $1 million
Cost of Goods Sold (COGS) = 65% of sales
= 65% * 17
= $11.05 million
Days Sales outstanding = (Debtors / Net Credit Sales) * 365
= (4 / 17)* 365
= 85.88 days
Days Inventory outstanding = (Inventory / COGS) * 365
= (3 / 11.05)* 365
= 99.10 days
Days Payables outstanding = (Payable / COGS) * 365
= (1 / 11.05)* 365
= 33.03 days
Cash Conversion Cycle (CCC) = Days Sales outstanding + Days Inventory outstanding - Days Payables outstanding
= 85.88 + 99.10 - 33.03
= 151.95 days
b.) If inventories and receivables by 8% each and increaseits payables by 8%, not any change in sales or cost of goods sold, calculate the the new CCC
Sales (same) = $17 million
Inventory = 3 - 8% = $2.76 million
Receivables = 4 - 8% = $3.68 million
Payables = 1 + 8% = $1.08 million
Cost of Goods Sold (COGS) = 65% of sales
= 65% * 17
= $11.05 million
Days Sales outstanding = (Debtors / Net Credit Sales) * 365
= (3.68 / 17)* 365
= 79.01 days
Days Inventory outstanding = (Inventory / COGS) * 365
= (2.76 / 11.05)* 365
= 91.17 days
Days Payables outstanding = (Payable / COGS) * 365
= (1.08 / 11.05)* 365
= 35.67 days
Cash Conversion Cycle (CCC) = Days Sales outstanding + Days Inventory outstanding - Days Payables outstanding
= 79.01 + 91.17 - 35.67
= 134.51 days
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