Question

Jiffy Park Corp. has annual sales of $50,736,000, an average inventory level of S15,010,000, and average accounts receivable of $10,010,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,950,000 and accounts receivable by $1,950,000. 7 points)
a. What is Jiffy Park's cash conversion cycle (CCC) prior to the changes proposed'?
b. What is Jiffy Park's CCC after implementing the suggested changes?
c. What is the net change in Jiffy Park's CCC given what you just calculated above?
d. Why is this significant?

Answer 1

Answer:

Jiffy Park Corp.

Cash Conversion Cycle:

a. Prior to proposed changes:

CCC = 169 days

b. After implementing changes:

CCC = 129 days

c. The change in CCC is 40 days

d. It is significant.  It is about 24% reduction in the CCC.  It is equal to the days that payable are outstanding under the proposed plan.

Explanation:

a) Data and Calculations:

Current annual sales = $50,736,000

Average inventory level = $15,010,000

Average accounts receivable = $10,010,000

Cost of goods sold = 85% of sale s= $43,125,600

Normal Days Payable Outstanding = 30 days

New Plan:

Planned Days Payable Outstanding = 40 days

Annual sales = $50,736,000

Average inventory level = $13,060,000 ($15,010,000 - $1,950,000)

Average accounts receivable = $8,060,000 ($10,010,000 - $1,950,000)

Cash Conversion Cycle:

a. Prior to proposed changes:

Days Inventory Outstanding = $15,010,000/$43,125,600 * 365 = 127 days

Days Receivable OUtstanding = $10,010,000/$50,736,000 * 365 = 72 days

Days Payable Outstanding = 30 days

CCC = 169 (127 + 72 - 30) days

b. After implementing changes:

Days Inventory Outstanding = $13,060,000/$43,125,600 * 365 = 111 days

Days Receivable OUtstanding = $8,060,000/$50,736,000 * 365 = 58 days

Days Payable Outstanding = 30 days

CCC = 129 (111 + 58 - 40) days

c. The change in CCC is 40 days (169 - 129)

d. It is significant.  It is about 24% reduction in the CCC.  It is equal to the days that payable are outstanding under the proposed plan.