Question

DOLLAR BILL'S, a retail store in New York City, buys its inventory on credit. Upon purchase, it is given 30 days in which to pay its suppliers. It sells all of its merchandise on credit. It extends 60 days of credit to its customers. Its inventory turnover rate is 60 days. Situation 1 Using the Cash Conversion Model, measure DOLLAR BILL'S financing cycle in both days and money ($US) using the following assumptions: Sales of $730,000 Gross Margin of 30% Financing Rate 61/2% Situation 2 Recent management decisions have had the following impact: DOLLAR BILL has renegotiated its credit line so that it has 35 days to pay its suppliers It now extends 45 days of credit to its customers, It has an inventory turnover rate of 45 days. All other factors remain the same. Has DOLLAR BILL’S financing cycle improved or declined? Quantify the change in days and in dollars. Please show your work.

Answer 1

	Situation 1					Situation 2
	Receivable from customers		60	days		Receivable from customers		45	days
Add:	Inventory turnover		60	days	Add:	Inventory turnover		45	days
Less:	Days payable		30	days	Less:	Days payable		35	days
	Cash conversion cycle		90	days		Cash conversion cycle		55	days
	Sales		$7,30,000.00			Sales		$7,30,000.00
	Gross margin		30%			Gross margin		30%
	Gross profit		$2,19,000.00			Gross profit		$2,19,000.00
	COGS (Inventory)		$5,11,000.00			COGS (Inventory)		$5,11,000.00
	Finance cost of financing @ 6.5% for 30 days		$         2,768			Finance cost of financing @ 6.5% for 30 days		$         3,229
	Net cash in $		$     2,16,232			Net cash in $		$     2,15,771