Question

Working capital investment

Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,600 batteries a day at a cost of $4 per battery for materials and labor. It takes the firm 24 days to convert raw materials into a battery. Prestopino 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.

What is the length of Prestopino's cash conversion cycle? Round your answer to two decimal places.
________ days

At a steady state in which Prestopino produces 1,600 batteries a day, what amount of working capital must it finance? Round your answer to the nearest cent.
$   ________

By what amount could Prestopino 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 cent.
$   ________

Prestopino'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 Prestopino to decrease its inventory conversion period to 18 days and to increase its daily production to 2,100 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

(Part – 1). Cash conversion cycle = 34 days

Explanation;

Cash conversion cycle = Days sales outstanding + Days inventory outstanding – Days payable outstanding

Let’s put the values in above given formula;

Cash conversion cycle (40 days + 24 days – 30 days) = 34 days

(Part – 2). Working capital financing = $217600

Explanation;

Working capital financing = Per day production * Cost per unit * Cash conversion cycle

Let’s put the values in above given formula;

Working capital financing (1600 * $4 * 34) = $217600

(Part – 3). Working capital reduction = $12000

Explanation;

Working capital reduction = Per day production * Cost per unit * Increase in days payable outstanding

Let’s put the values in above given formula;

Working capital financing (1600 * $4 * 2) = $12800

(Part – 4).

Cash conversion cycle = 28 days

Working capital financing = $705600

Explanation;

1. Cash conversion cycle = Days sales outstanding + Days inventory outstanding – Days payable outstanding

Let’s put the values in above given formula;

Cash conversion cycle (40 days + 18 days – 30 days) = 28 days

2. Working capital financing = Per day production * Cost per unit * Cash conversion cycle

Let’s put the values in above given formula;

Working capital financing (2100 * $12 * 28) = $705600