Primrose Corp has $11 million of sales, $2 million of inventories, $4 million of

Question

Primrose Corp has $11 million of sales, $2 million of inventories, $4 million of receivables, and $2 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. Do not round intermediate steps. What is Primrose's cash conversion cycle (CCC)? Round your answer to two decimal places. days If Primrose could lower its inventories and receivables by 12% each and increase its payables by 12%, all without affecting sales or cost of goods sold, what would be the new CCC? Round your answer to two decimal places. days 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

CCC = Inventory conversion period + Average collection period - Payables deferral period. Inventory conversion period = Inventory / Cost of goods sold per day = $2,000,000 / [(0.8)($15,000,000)]/365 =$2,000,000 / $32,876.7123 = 60.83 days. Average collection period = (Receivables) /( Sales/365) = $3,000,000 / $15,000,000 /365 =73 Days Payables deferral period = Payables / (Cost of goods sold/365) = $1,000,000 / $32,876.7123 = 30.42 days CCC would be 60.83+73-30.42 = 103.41 Days -------------------------------------------------------------------------. Inventory = $2,000,000 × 0.9 = $1,800,000. A/R = $3,000,000 × 0.9 = $2,700,000. A/P = $1,000,000 × 1.1 = $1,100,000. Inventory conversion period $1,800,000 / $32,876.7123 = 54.75 Days Average collection period = $2,700,000 / $15,000,000 /365 = 65.70 Days Payables deferral period= $1,100,000 / $32,876.7123 = 33.46 days New CCC = 54.75 + 65.70 - 33.46 = 86.99 days ˜ 87 days. In such a case, the Cash freed up would be calculated as under:: Inventory = (60.83 - 54.75) × $32,876.7123 = $199,890.41. Receivables = (73 - 65.70) × $41,095.8904 = $300,000. Payables = (33.46 - 30.42) × $32,876.7123 = $99,945.2055. Cash freed up = $199,890.41 + $300,000 - $99,945.2055 = $399,945.2045 ˜ $400,000. $400,000 × 0.08 = $32,000 increase in pre-tax profit. I am more than sure this would help... Read more: Cash conversion cycle - Primrose Corp has $15 million of sales, - JustAnswer http://www.justanswer.com/finance/532as-cash-conversion-cycle-primrose-corp-15-million-sales.html#ixzz28UKbJSNU

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