Question

Parramore Corp has $12 million of sales, $1 million of inventories, $2 million of receivables, and $2 million of payables. Its cost of goods sold is 85% of sales, and it finances working capital with bank loans at an 6% 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 = days sales outstanding + days inventory outstanding - days of payable outstanding

days sales outstanding = (average receivable / average sales ) * 365

days inventory outstanding = (average inventory / cost of goods sold ) * 365

days of payable outstanding = ( account payables / cost of goods sold) * 365

in present case, sales = 12 million

inventory= 1 million = average inventory

receivable = 2 million = average receivable

payable = 2 million = account payables

cost of goods sold (COGS) = 85% OF SALES = 85% OF 12 MILLION = 10.20

As we have all the figures, simply put in numers and you can get answers.

2. As the inventories and receivables are decreased by 11% and payables increase by 11%, these three inputs shall be changed.

inventory= 1 million less 11% = 0.89 million

receivable = 2 million less 11% = 1.78 million

payable = 2 million plus 11% = 2.22 million

simply, plug these numbers in above formula and get answers

ALL OTHER PARTS CAN BE SOLVED SIMILARLY