Question

Network Solutions just introduced a? new, fully automated manufacturing plant that produces 2,000wireless routers per day with materials costs of ?$40 per router and no other costs. The average number of days a router is held in inventory before being sold is 67 days. In? addition, they generally pay their suppliers in 12 days, while collecting from their customers after 21 days.

a.??What is the cash conversion? cycle?

b.??What would happen to the cash conversion cycle if they could stretch their payments to suppliers from 12 days to 32 ?days?

c.??How much would working capital be reduced if they stretched their payments to suppliers from 12 days to 32 ?days?

Answer 1

CCC = CASH CONVERSION CYCLE = INVENTORY CONVERSION PERIOD + AVERAGE COLLECTION PERIOD - AVERAGE PAYABLES PERIOD

(a) CCC = 67 DAYS + 21 DAYS - 12 DAYS = 76 DAYS

(b) CCC = 67 DAYS + 21 DAYS - 32 DAYS = 56 DAYS

THIS WILL REDUCE CASH COVERSION CYCLE, GOOD FOR COMPANY

(c ) REDUCTION IN WORKING CAPITAL DUE TO STRECHING OF PAYMENTS TO SUPPLIERS IS =

PRSENT PAYABLE PERIOD IS 12 DAYS

ANNUAL PURCHASE = 2000 X 40 X 360 DAYS = 28800000

NOW PAYABLE PERIOD = (360 DAYS X 2880000)/ AVERAGE PAYABLES

SO 12 DAYS = (360 X 2880000)/ PAYABLES

SO PAYABLES = 864000000 YEARLY

NOW IF PAYABLE PERIOD IS INCREASED TO 32 DAYS , THEN PAYABLES WILL BE

32 = (360 X 2880000)/ PAYABLES

PAYABLES = 32400000 YEARLY

SO REDUCTION IN WORKING CAPITAL = 86400000 - 32400000 = 54000000 YEARLY