Rock Stone has: $13 million of sales $2 million of inventories $3 million of rec
ID: 2673233 • Letter: R
Question
Rock Stone 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. Rock Stones cash conversion cycle (CCC) 84.23 Days
1. If Rock Stone 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
COGS = 0.75 , Interest on bank loans = 8%
CCC = Inventory Conversion Period + Average Collection Period - Payables deferral Period
Inventory Conversion Period
Inventory / Cost of goods Sold per day
2,000,000/
(0.75x $13,000,000) /365
74.87
Average Collection Period
Receivables / Sales /365
3,000,000 / $13,000,000 / 365
84.23
Payables deferral Period
Paybles / Cost of goods Sold/365
2,000,000 / $26712.32
74.87
CCC
84.23
Inventory = $ 2,000,000 x 0.9 = $1,800,000
A/R = $3,000,000 x 0.9 = $2,700,000
A/P =$ 2,000,000 x 0.9 = $1,800,000
Inventory Conversion Period
Inventory / Cost of goods Sold per day
$1,800,000/$ 26712.32
67.38 days
Average Collection Period
Receivables / Sales /365
2,700,000 / $13,000,000 / 365
75.80 days
Payables deferral Period
Paybles / Cost of goods Sold/365
1,800,000/$ 26712.32
67.38 days
New CCC
67.38 days.
================
Cash Freed up =
Delta Inventory = (74.87- 67.38) x $ 26712.32 = $ 200,075.27
Delta Receivables = (84.23- 75.80) x $ 35616.43= $300,246.57
Delta Payables = (74.87-67.38) x $ 26712.32 = $ 200,075.27
Cash Freed up =$ 200,075.27+$300,246.57-$ 200,075.27
= $300,246.57
=====================
= $ 24,019------------ increase in per tax profit
Inventory Conversion Period
Inventory / Cost of goods Sold per day
2,000,000/
(0.75x $13,000,000) /365
74.87
Average Collection Period
Receivables / Sales /365
3,000,000 / $13,000,000 / 365
84.23
Payables deferral Period
Paybles / Cost of goods Sold/365
2,000,000 / $26712.32
74.87
CCC
84.23
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