Working capital investment Prestopino Corporation produces motorcycle batteries.
ID: 2645831 • Letter: W
Question
Working capital investment
Prestopino Corporation produces motorcycle batteries. Prestopino turns out 2,300 batteries a day at a cost of $4 per battery for materials and labor. It takes the firm 24 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. Assume 365 days in year for your calculations.
What is the length of Prestopino's cash conversion cycle? Round your answer to two decimal places.
days
At a steady state in which Prestopino produces 2,300 batteries a day, what amount of working capital must it finance? Round your answer to the nearest cent.
$
By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 37 days? Round your answer to the nearest cent.
$
Prestopino's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 18 days and to increase its daily production to 2,550 batteries. However, the new process would cause the cost of materials and labor to increase to $10. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? Round your answers to two decimal places.
Explanation / Answer
Cash Conversion Cycle
34
Days
Working Capital Financing
$
312800
Reduce in Working Capital if Payable period is 37 days
$
64400
If New production process implemented
New Cash Conversion Cycle
28
Days
New Working Capital Requirement
$
714000
Effect: Cash Cycle will reduce and Working Capital Requirement will Increase.
Explanation:
Cash Conversion Cycle = DIO+DSO-DPO
Where:
DIO= Days Inventory Outstanding means time to convert raw material to finished Goods given 24 Days
DSO= Days Sales Outstanding means time allowed customer to pay i.e. given 40 Days
DPO= Days Payable Outstanding means pays it suppliers i.e. given 30 days
So our Cash Conversion Cycle would be
CCC=DIO+DSO-DPO = 24+40-30 = 34 Days
Working Capital Financing = Production Per Day X Cash Conversion Cycle X Cost per Battery
= 2300 X 34 X $4
= $312800
Reduce in Working Capital if Payable period is 37 days:
if Payable period increased the Cash conversion cycle will reduce
as new CCC= DIO+DSO-DPO = 24+40-37 = 27 days
Which is 7 days shorter than previous Cash Conversion Cycle which was 34 (CCC)
so we will need less working capital for 7 days
so Reduce in WC = 2300 X 7 X $4
=$64400
If New production process implemented:
CCC= DIO+DSO-DPO = 18+40-30 = 28 Days
Working Capital Requirement = Production Per Day X CCC X Cost per Battery
=2550 X 28 X $ 10
= $714000
Cash Conversion Cycle
34
Days
Working Capital Financing
$
312800
Reduce in Working Capital if Payable period is 37 days
$
64400
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