Prestopino Corporation produces motorcycle batteries.Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials

a. The length of Prestopino's cash conversion cycle can be calculated as follows: Cash conversion cycle = Inventory conversion period + Accounts receivable collection period - Accounts payable payment period Inventory conversion period = 22 days Accounts receivable collection period = 40 days Accounts payable payment period = 30 days Cash conversion cycle = 22 + 40 - 30 Cash conversion cycle = 32 days b. The working capital that Prestopino must finance can be calculated as follows: Working capital = (Average daily production x Inventory conversion period) + (Accounts receivable collection period - Accounts payable payment period) x Cost per unit Average daily production = 1,500 batteries Inventory conversion period = 22 days Accounts receivable collection period = 40 days Accounts payable payment period = 30 days Cost per unit = $6 Working capital = (1,500 x 22) + (40 - 30) x $6 Working capital = $33,600 c. If Prestopino is able to stretch its payables deferral period to 35 days, its accounts payable payment period would increase by 5 days. Therefore, the new accounts payable payment period would be: Accounts payable payment period = 30 + 5 Accounts payable payment period = 35 days Using the same formula as in part (b), the new working capital financing needs would be: Working capital = (1,500 x 22) + (40 - 35) x $6 Working capital = $33,900 Prestopino could reduce its working capital financing needs by $300 if it is able to stretch its payables deferral period to 35 days. d. If the new production process is implemented, the inventory conversion period would decrease to 20 days and the daily production would increase to 1,800 batteries. The new cost per unit would be $7. Using the same formula as in part (a), the new cash conversion cycle would be: Cash conversion cycle = Inventory conversion period + Accounts receivable collection period - Accounts payable payment period Inventory conversion period = 20 days Accounts receivable collection period = 40 days Accounts payable payment period = 30 days Cash conversion cycle = 20 + 40 - 30 Cash conversion cycle = 30 days Using the same formula as in part (b), the new working capital financing needs would be: Working capital = (1,800 x 20) + (40 - 30) x $7 Working capital = $37,400 Therefore, if the new production process is implemented, the cash conversion cycle would decrease to 30 days, but the working capital financing needs would increase to $37,400.