Question

Parramore Corp has $10 million of sales, $1 million of inventories, $4 million of receivables, and $2 million of payables. Its cost of goods sold is 70% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations. Do not round intermediate steps. 1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places days 2. If Parramore 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? Do not round intermediate calculations. Round your answer to two decimal places. days 3. How much cash would be freed up, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For example, 13.2 million should be entered as 13,200,000. $ 4. By how much would pretax profits change, if Parramore could lower its inventories and receivables by 11% each and increase its payables by 11%, all without affecting sales or cost of goods sold? Do not round intermediate calculations. Round your answer to the nearest cent. Write out your answer completely. For example, 13.2 million should be entered as 13, 200,000.

Answer 1

1)

Cash Conversion Cycle = DIO + DSO – DPO

Where

DIO = Days Inventory Outstanding = Inventory / COGS * 365 =

DSO = Days Sales Outstanding = Accounts Receivables / Sales * 365

DPO = Days Payable Outstanding = Accounts Payable / COGS * 365

Sales = 10 million

Inventories = 1 million

Account Receivables = 4 million

Account Payable = 2 million

COGS = 70% of Sales = 70% of 10 million = 7 million

DIO = 1,000,000 / 7,000,000 * 365 = 52.1429

DSO = 4,000,000 / 10,000,000 * 365 = 146

DPO = 2,000,000 / 7,000,000 * 365 = 104.2857

Cash Conversion Cycle = 52.1429 + 146 – 104.2857 = 93.8572 = 93.86

2)

New CCC if Inventory and receivables are lower by 11% each and increase the payable by 11%

New Inventories = 1000000 * 0.89 = 890,000

Account Receivables = 4000000 * 0.89 = 3,560,000

Account Payable = 2000000 * 1.11 = 2,220,000

DIO = 890,000 / 7,000,000 * 365 = 46.4071

DSO = 3,560,000 / 10,000,000 * 365 = 129.94

DPO = 2,220,000 / 7,000,000 * 365 = 115.7571

Cash Conversion Cycle = 46.4071 + 129.94 – 115.7571 = 60.59

3)

770000

4)

Cash freed up is 770000 and finance rate is 8% so

770000* 8% = 61600 is the change in profit.

Hope this helps

Change in inventory, receivables and payable won't make any impact on profit so answer is Zero.'