20.07.2022 - 22:30

# 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 Question: 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 into a battery. Prestopino allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.

a. What is the length of Prestopino’s cash conversion cycle?

b. At a steady state in which Prestopino produces 1,500 batteries a day, what amount of working capital must it finance?

c. By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days?

d. Prestopino’s management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Prestopino to decrease its inventory conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? Answers (1) • April 9, 2023 в 19:36 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. Do you know the answer? Not sure about the answer? Find the right answer to the question 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 by subject Business, and if there is no answer or no one has given the right answer, then use the search and try to find the answer among similar questions.
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