Problem 15-6 Working capital investment Prestopino Corporation produces motorcyc
ID: 2612825 • Letter: P
Question
Problem 15-6
Working capital investment
Prestopino Corporation produces motorcycle batteries. Prestopino turns out 2,100 batteries a day at a cost of $5 per battery for materials and labor. It takes the firm 23 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. Assume 365 days in year for your calculations.
By what amount could Prestopino reduce its working capital financing needs if it was able to stretch its payables deferral period to 47 days? Round your answer to the nearest cent.
$
Explanation / Answer
Current Operating Cycle = No of Days required for Raw Material Conversion + Debtor Conversion - Creditor Conversion
= 23 + 40 - 30
= 33 Days
Working Capital requirement currently = 2100 Batteries * $5 per battery * 33 days = $346500
Possible reduction in Operating cycle
= 23 days + 40 days - 47 days
= 16 days
New Working capital requirement = 2100 * 5 * 16days
=168000
The reduction in WC is 346500 - 168000 = $ 178500