Question

Data on Stretch It Out, Inc. for the most recent year are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year. Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Cost of goods sold =   $75,000

Payables =       $5,000

Payables deferral period (PDP) =       24.33

Benchmark payables deferral period =           40.00

Answer 1

PDP or Payables deferral period is given by the formula

PDP = Accounts payable/(cost of goods sold/365)

Let X be the new accounts payable for PDP_benchmark. Now the formula becomes:

PDP_benchmark= X*365/COGS

Given: PDP_benchmark=40 , COGS = 75000

So, 40 = X*365/75000.

Solving for X, we get X= $8219.18

Accounts payable = $5000

Increase in Accounts Payable = X-Accounts payable = $8219.18 - $5000 = $3219.18

Answer: Increase in accounts payable = $3219.18