Cash Conversion Cycle - Parlow Packing
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Parlow Packing currently has on its balance sheet:
$35,750 in cash
$47,000 in accounts receivable
$66,000 in inventories
$13,000 in accrued liabilities
$72,000 in accounts payable
The firm's production manager has determined that the cost of goods sold accounts for 80% of the sales revenue it produces. The firm has determined that the length of the firm's cash conversion cycle is 16.79 days.
a.) What is Parlow's annual sales?
b.) The firm's production manager had determined that through negotiation with its suppliers, the firm could reduce the ratio of the cost of goods sold to sales down to 70%, and thus reduce its cash conversion cycle time. However, the firm would then take this opportunity to use cash to reduce its accounts payable. The firm realizes that reducing accounts payable increases the cash conversion cycle time, but it is more concerned with pleasing its creditors, who are unhappy with the firm's liquidity position. None of these changes is expected to have any impact upon sales. If the firm reduces accounts payable enough to improve the current ratio to 2.0, what would be the length of the firm's cash conversion cycle?
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Solution Summary
The solution explains how to calculate annual sales and the impact on the cash conversion cycle of the given changes.
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Please see the attached file.
Parlow Packing currently has on its balance sheet:
$35,750 in cash
$47,000 in accounts receivable
$66,000 in inventories
$13,000 in accrued liabilities
$72,000 in accounts payable
The firm's production manager has determined that the cost of goods sold accounts for 80% of the sales revenue it produces. The firm has determined that the length of the firm's cash conversion cycle is 16.79 days.
a.) What is Parlow's annual sales?
Setting up the formula for the cash conversion cycle, sales can be calculated.
CCC = (AR/Avg. Daily Sales) + (Inv/Avg. Daily Sales) - ...
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