Question

4. Pizza di Joey operates several food trucks that provide hot food and beverages in the Washington DC area. The company has annual sales of $625,400. Cost of goods sold average 32 percent of sales and the profit margin is 4.5 percent. The average accounts receivable balance is $34,700. Assume 365 days per year.

a. On average, how long does it take the company to collect payment for its services?

b. What is the change in the Payables deferral period if the payables turnover has gone from an average of 10.50 times to 11.45 times per year?

c. What is the length of the company's cash conversion cycle after the change in the Payables deferral period if the inventory turnover is 22.20 times? (10 points)

Answer 1

Answer a.

Average Collection Period = 365 * Average Accounts Receivable / Annual Sales
Average Collection Period = 365 * $34,700 / $625,400
Average Collection Period = 20.25 days

Answer b.

If payable turnover is 10.50 times:

Payables Deferral Period = 365 / Payable Turnover
Payables Deferral Period = 365 / 10.50
Payables Deferral Period = 34.76 days

If payable turnover is 11.45 times:

Payables Deferral Period = 365 / Payable Turnover
Payables Deferral Period = 365 / 11.45
Payables Deferral Period = 31.88 days

Decrease in Payables Deferral Period = 34.76 - 31.88
Decrease in Payables Deferral Period = 2.88 days

Answer c.

Average Inventory Period = 365 / Inventory Turnover
Average Inventory Period = 365 / 22.20
Average Inventory Period = 16.44 days

Cash Conversion Cycle = Average Inventory Period + Average Collection Period - Payables Deferral Period
Cash Conversion Cycle = 16.44 + 20.25 - 11.45
Cash Conversion Cycle = 25.24 days