Primrose Corp has $20 million of sales, $3 million of inventories, $2 million of
ID: 2712598 • Letter: P
Question
Primrose Corp has $20 million of sales, $3 million of inventories, $2 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. Round intermediate steps to 2 decimal places.
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 11% each and increase its payables by 11%, 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
Inventory Turnover Ratio = COGS/Inventory = 0.75 * 20 /3 = 5
Days Holiding in Inventory (DIO)= 365/Inventory Turnover Ratio = 365/5 = 73
Receivables Turnover Ratio = Sales/Receivable = 20/2 = 10
DSO = 365/ Receivables Turnover Ratio = 365/ 10 = 36.5
Payables Turnover Ratio = COGS /Payables = 15/1 = 15
DPO = 365/Payables Turnover Ratio = 365/15 = 24.33
CCC = DIO + DSO - DPO = 73 + 36.5 - 24.33 =85.17 days
New ITR = 15/ 3* (1 -11%) = 5.62
DIO = 365/5.62 = 64.97
New Receivables Turnover Ratio = 20/ 2* (1 - 11%) = 11.24
DSO = 365/11.24 = 32.49
New Payables Turnover Ratio = 15/1 * (1 + 11%) = 13.51
DPO = 365/13.51 = 27.01
New CCC = 64.97 + 32.49 -27.01 = 70.45 days
Old Net Working Capital = Inventory + Receivables - Payables = 3 + 2 -1 = $4million
New Net Working Capital = 3 * 0.89 + 2 * 0.89 - 1 * 1.11 = 2.67 + 1.78 - 1.11 = $3.34 million
Cash that would be freed up = Old Net Working Capital - New Net Working Capital
= 4 - 3.34 = $0.66 million = $660,000
Old Pre Tax Profit = Sales - COGS - 9% * Old Net Working Capital
= 20 - 0.75 * 20 - 9% * 4 = $4.64 million = 4,640,000
New Pre Tax Profit = Sales - COGS - 9% * New Net Working Capital
= 20 - 0.75 * 20 - 9% * 3.34 = $4.6994 million = 4,699,400
Change in Pre Tax Profit = 4,699,400 - 4,640,000 = $59,400
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.