Question

Pasha Corporation produces motorcycle batteries. Pasha turns out 1,700 batteries a day at a cost of $8 per battery for materials and labor. It takes the firm 23 days to convert raw materials into a battery. Pasha allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. Assume 365 days in year for your calculations.

1. What is the length of Pasha's cash conversion cycle? Round your answer to two decimal places.
   days
2. 
   
3. At a steady state in which Pasha produces 1,700 batteries a day, what amount of working capital must it finance? Round your answer to the nearest dollar.
   $
4. 
   
5. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 32 days? Round your answer to the nearest dollar.
   $
6. 
   
7. Pasha's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 15 days and to increase its daily production to 2,700 batteries. However, the new process would cause the cost of materials and labor to increase to $12. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? Round your answers to two decimal places.
   

   Cash conversion cycle		days
   Working capital financing	$

Answer 1

a. Cash conversion cycle = ICP + DSO - PDP = 23 + 40 – 30 = 33 days

b. Working capital financing = No. of Batteries x CCC x Cost per battery = 1,700 * 33 * $8 = $448,800

c. If the payables deferral period was increased by 2 days, then its cash conversion cycle would decrease by 2 days, so its working capital financing needs would decrease by:

= 1,700 * 2 * $8 = $27,200

d. CCC = 15 + 40 - 30 = 25 days

Working capital financing = No. of Batteries x CCC x Cost per battery = 2,700 * 25 * $12 = $810,000