(Related to Checkpoint 18.2) (Calculating the cash conversion cycle) Network Solutions just introduced a new, fully automa
ted manufacturing plant that produces 1 comma 000 wireless routers per day with materials costs of $50 per router and no other costs. The average number of days a router is held in inventory before being sold is 73 days. In addition, they generally pay their suppliers in 38 days, while collecting from their customers after 28 days. a. What is the cash conversion cycle? b. What would happen to the cash conversion cycle if they could stretch their payments to suppliers from 38 days to 58 days? c. How much would working capital be reduced if they stretched their payments to suppliers from 38 days to 58 days?
A) 63 Days. B ) 43 Days. C) As the amount of payments received for the routers sold in 20 days.
Explanation:
A) The cash conversion cycle is a term referring to the amount of time it takes for a company to sell the products in their inventory and turn them into cash. For the example given in the question, the sum of days until the company gets paid which is 101 days. 73 days until the routers are sold plus 28 days more until they get paid by the customers. The cash conversion cycle is the number of days starting from the day they pay their supplier up until the day they get paid. So it is equal to 101 - 38 = 63 days.
B) If they could stretch their payments to suppliers from 38 days to 58 days, the cash conversion cycle would be 43 days instead of 63 days.
C) If they stretched their payments to suppliers from 38 days to 58 days, the working capital would be reduced as the amount of routers that they receive payments for between that period of time.
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