Question

Arramore Corp has $10 million of sales, $3 million of inventories, $2 million of receivables, and $1.75 million of payables. Its cost of goods sold is 75% of les, and it finances working capital with bank loans at a 7% rate. Assume 365 days in year for your calculations.

1. What is Parramore's cash conversion cycle (CCC)? Do not round intermediate calculations. Round your answer to two decimal places. days

Answer 1

To calculate Parramore Corp's cash conversion cycle (CCC), the inventory conversion period (146 days), receivables collection period (73 days), and payables deferral period (85 days) are determined and summed up, resulting in a CCC of 134 days.

Step-by-step explanation:

The student's question is centered around the calculation of Parramore Corp's cash conversion cycle (CCC). To determine the CCC, we need to compute the inventory conversion period, receivables collection period, and payables deferral period. The inventory conversion period is how long inventory sits before being sold, the receivables collection period is how long it takes for the company to collect payments from its customers, and the payables deferral period is how long the company takes to pay its suppliers.

To calculate the inventory conversion period (ICP), we use the following formula: (Inventory/Cost of Goods Sold) × 365 days. Cost of Goods Sold (COGS) is 75% of sales, so COGS = $10 million × 0.75 = $7.5 million. Therefore, ICP = ($3 million / $7.5 million) × 365 = 146 days.

For the receivables collection period (RCP): (Receivables/Annual Sales) × 365 days. RCP = ($2 million / $10 million) × 365 = 73 days.

The payables deferral period (PDP) is calculated as: (Payables/COGS) × 365 days. PDP = ($1.75 million / $7.5 million) × 365 = 85 days.

Finally, the CCC is calculated as: ICP + RCP - PDP = 146 days + 73 days - 85 days = 134 days.