Prestopino Corp. produces 1,500 batteries for cars daily, with wage and raw mate

Question

Prestopino Corp. produces 1,500 batteries for cars daily, with wage and raw mater costs, of $ 6 per unit. The signing will take 22 days to convert the raw material into batteries It allows customers to pay for the batteries within 40 days and the firm generally pays its suppliers within 30 days. a) what is the cash conversion cycle? b) how much is the amount of working capital that needs to be financed, if kept producing 1,500 batteries? C) if the firm reduced to 35 days, your pay period, how much the financing needs of working capital will be reduced?

Explanation / Answer

Answer:

a) Cash Conversion Cycle =Days sales outstanding + Days inventory outstanding - Days payables outstanding

= 40 Days + 22 Days - 30 Days

=32 days

b) Cost to produce 1500 Batteries =1500 *$6 = $9000

Working capital cycle = Days sales outstanding - Days payables outstanding

= 40-30 =10 days

Working capital need = $9000 * 10 days /   365 days = $246.58

c) Working capital cycle = Days sales outstanding - Days payables outstanding

= 35-30 =5 Days

Working capital need = $9000 * 5 days /   365 days = $123.29

Hence working capital need shall be reduced by = 246.58

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