Primrose Corp has $19 million of sales, $2 million of inventories, $3 million of

Question

Primrose Corp has $19 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 75% 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 8% each and increase its payables by 8%, 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

Cash Conversion Cycle (CCC) = DIO + DSO - DPO

Where:
DIO represents days inventory outstanding
DSO represents days sales outstanding
DPO represents days payable outstanding

DSO is days sales outstanding = Average Accounts Receivable × 365 ÷ Credit Sales
DIO is days inventory outstanding = Average Inventories × 365 ÷ Cost of Goods Sold
DPO is days payables outstanding = Average Accounts Payable × 365 ÷ Cost of Goods Sold

Add decrese in current assets + increase in current liabilities

= 240,000 + 80,000 + 160,000

= 480,000

No change in pre tax income

New AR          3,000,000            2,760,000 AP          1,000,000            1,080,000 Sales        19,000,000          19,000,000 Inventories          2,000,000            1,840,000 COGS        14,250,000          14,250,000 Loan 9% DSO                     53.02 DIO                     47.13 DPO                     27.66 CCC                  127.81 Days

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