16-1 Cash Conversion Cycle.Primrose Corp has $15 million of sales, $2 million of inventories, $3 million of receivables, and $1 million of payables. Its cost of goods sold is 80% of sales, and its finances working capital with bank loans at an 8% rate. what is Primrose's cash conversion cycle? If Primrose could lower its inventories and receivables by 10% each and increase its payables by 10% all without affecting sales or cost of goods sold, what would be the new CCC, how much cash would be freed up, and how would that affect pretax profits? (answer the 1st part of the problem. Do not calculate the new CCC when lowering inventories by 10% and increasing payables by 10%)
1. Sales = $15,000,000; Inventory = $2,000,000; A/R = $3,000,000; A/P = $1,000,000; COGS = 0.8(Sales); Interest on bank loan = 8%; CCC = ?
CCC = Inventory conversion period + Average collection period – Payables deferral period.
Inventory conversion period =
=
=
= 60.83 days.
Average collection period =
=
= 73 days.
Payables deferral period =
=
= 30.42 days.
CCC = 60.83 + 73 – 30.42 = 103.41 days.
16-4 CCC- Zocco Corporation has an inventory conversion period of 75 days, an average collection period of 38 days, and a payables deferral period of 30 days. A-What is the length of the cash conversion cycle? B- If Zocco’s annual sales are $3,421,875 and all sales are on credit, what is the investment in accounts receivable? C- How many times per year does Zocco turn over its inventory?
a. =
= 75 + 38 – 30 = 83 days.
b. Average sales per day = $3,421,875/365 = $9,375.
Investment in receivables = $9,375 ´ 38 = $356,250.
c. Inventory turnover = 365/75 = 4.87´.