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.
