Peppermint Patty Corporation has: $13 million of sales $2 million of inventories
ID: 2673116 • Letter: P
Question
Peppermint Patty Corporation has:$13 million of sales
$2 million of inventories
$3 million of receivables
$2 million of payables
Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations. Do not round intermediate steps. Peppermints cash conversion cycle (CCC) 84.23 Days
1. If Peppermint Patty Corporation could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places.
___________Days
2. How much cash would be freed-up? Round your answer to the nearest cent.
$____________
By how much would pre-tax profits change? Round your answer to the nearest
cent.
$____________
Explanation / Answer
sales = 13,000,000
inventory = 2,000,000
a/r = 3,000,000
a/p = 2,000,000
CCC = inventory conversion period + average collection period - payable deferrals period
inventory conversion period = inventory/cost of goods sold per day
cost of goods sold per day = rate of sales (.75) * total sales (15,000,000) divided by days (365)
= 2000000/((.75)(15000000)/365)
=64.8888888 (repeating) days
average collection period = (a/r) / (sales/365)
average collection period = 3,000,000 / (15,000,000 / 365)
= 3,000,000 / 41095.89
= 73 days
payables deferral period = (a/p) / (cost of goods sold per day)
= 2,000,000 / ((.75)(15000000)/365)
= 64.888888 (repeating) days
If Peppermint Patty Corporation could lower its inventories and receivables by 9% each and increase its payables by 9%, all without affecting sales or cost of goods sold, what would be the new CCC?
inventory = 2,000,000 * 0.91 = 1,820,000
a/r = 3,000,000 * 0.91 = 2,730,000
a/p = 2,000,000 * 1.09 = 2,180,000
now just recalc everything the same but with these new numbers:
inventory conversion period = 1,820,000/((.75)(15000000)/365) = 59.0488888 (repeating) days
average collection period = 2,730,000 / (15,000,000 / 365) = 66.43 days
payables deferral period = 2,180,000 / ((.75)(15000000)/365) = 70.72888 (repeating) days
NEW CCC = 59.04888 + 66.43 - 70.72888 = 54.75 DAYS
cash freed up:
inventory = (64.888 - 59.04888) = 5.84 days
5.84 * ((.75)(15000000)/365) = 180,000.00
receivables = (73 - 66.43) = 6.57 days
6.57 * (15,000,000 / 365) = 270,000
payables (remember since it increased to change the order that you subtract)
= 70.72888 - 64.888 = 5.84 days
5.84 * ((.75)(15000000)/365) = 180,000
cash freed up = 180,000 + 270,000 - 180,000 = $270,000
increase in pre tax profit: your new freed up cash less the bank rate:
270,000 * .92 = $248,400
good luck i hope this helps (:
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