Please help with 15-6. What is the percentage cost of trade credit to customers

Question

Please help with 15-6.

What is the percentage cost of trade credit to customers who do not take the discount and pay in 40 days? e. What would happen to McDowell's accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30^th day? WORKING CAPITAL INVESTMENT Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. a. What is the length of Prestopino's cash conversion cycle? b. At a steady state in which Prestopino produces 1,500 batteries a day, what amount of working capital must it finance? c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days? d. Prestopino's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? CASH CONVERSION CYCLE Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie's 2014 sales (all on credit) were $150, 000; its cost of goods sold is 80% of sales; and it earned a net profit of 6%, or $9,000. It turned over its inventory 6 times during the year,

Explanation / Answer

a) Cash conversion cycle = 22 + 40 – 30 = 32 days.

b) Working capital financing = 1,500 x 32 x $6 = $288,000.

c) If the payables deferral period was increased by 5 days, then its cash conversion cycle would decrease by 5 days, so its working capital financing needs would decrease by:

Decrease in working capital financing = 1,500 x 5 x $6 = $45,000.

d) Cash conversion cycle = 20 + 40 – 30 = 30 days.

Working capital financing = 1,800 x 30 x $7 = $378,000.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.