WB 8.

3
Verbrugge Corporation is a leading U.S. producer of automobile batteries. Verbrugge turns out 1,500 batteries a day at a cost
of Rs.6 per battery for materials and labour. It takes the firm 22 days to convert raw materials into a battery. Verbrugge
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 Verbrugge cash conversion cycle?
b) If Verbrugge always produces and sells 1,500 batteries a day, what amount of working capital must it finance?
c) By what amount could Verbrugge reduce its working capital financing needs if it was able to stretch its payables
deferral period to 35 days?
d) Verbrugge's management is trying to analyze the effect of a proposed new production process on the working capital
investment. The new production process would allow Verbrugge 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 Rs.7. Assuming the change does not affect the receivables collection period (40 days) or the payables deferral period (30 days),
what will be the length of the cash conversion cycle and the working capital financing requirement if the new production process
is implemented?
WB 8.3
Given,
Per day production = 1,500 batteries
Material labour cost = Rs.6 per battery
Investment for each day production = 1,500 × 6 = Rs.9,000
Inventory conversion period (ICP) = 22 days
Receivable conversion period (RCP) = 40 days
Payable deferral period (PDP) = 30 days
Now,
a) Cash conversion cycle = ICP + RCP – PDP
= 22 + 40 – 30 = 32 days
b) The working capital financing= Cash conversion period × production cost per day
= 32 × Rs.9,000 = Rs.288,000
c) If PDP is lengthened to 35 days, the company’s cash conversion cycle and working capital tied up will be as follows:
Cash conversion cycle = ICP + RCP – PDP
= 22 + 40 - 35 = 27 days
Now working capital financing = 27 × Rs.9,000 = Rs.243,000
Therefore, the saving of working capital financing from past will be:
Saving = Rs.288,000 – Rs.243,000 =Rs.45,000
Alternatively,
Reduction on cash conversion cycle = 32 days – 27 days = 5 days
Saving of working capital investment = 5 × Rs.9,000 = Rs.45,000
d) When the new production process is used:
ICP = 20 days
Production unit per day = 1,800 batteries
Labour and material cost per unit = Rs.7
RCP = 40 days (same)
PDP = 30 days (same)
Cash conversion cycle =?
Working capital investment =?
Firstly, finding cash conversion cycle
Cash conversion cycle = ICP + RCP – PDP
= 20 + 40 – 30 = 30 days
Now, daily production cost = 1,800 × Rs.7 = Rs.12,600
The working capital investment = Rs.12,600 × 30 days = Rs.378,000

WB 8.5
The Saliford Corporation has an inventory conversion period of 60 days, a receivables collection period of 36 days, and a
payable deferral period of 24 days.
a) What is the length of the firm's cash conversion cycle?
b) If Saliford's annual sales are Rs.3,960,000 and all sales are on credit, what is the average balance in accounts receivable?
c) How many times per year does Saliford turnover its inventory?
d) What would happen to Saliford's cash conversion cycle if, on average, inventories could be turned over 8 times a year?

WB 8.5
Given,
Inventory conversion period (ICP) = 60 days
Receivable conversion period (RCP) = 36 days
Payable deferral period (PDP) = 24 days
a) Cash conversion cycle = ICP + RCP – PDP
= 60 + 36 – 24 = 72 days
b) Annual sales =Rs. 3,960,000 (Credit)
Account receivable= ?
We know that,
RCP (DSO/ACP) =
or, 36 days =
 Receivable = Rs.396,000
c) Inventory conversion period (ICP) =
Inventory turnover = = = 6 times
d) The cash conversion cycle of inventory turnover turned to 8 times can be calculated firstly by finding the ICP.
ICP = = = 45 days
Now,
Cash conversion cycle = ICP + RCP – PDP
= 45 + 36 – 24 = 57 days
[If inventory turnover increases the cash conversion cycle decreases]

WB 8.6
The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and days’ sales outstanding (DSO)
on its cash flow cycle. Flamingo's 1995 sales (all on credit) were Rs.180,000, and it earned a net profit of 5%, or Rs.9,000. The
cost of goods sold equals 85% of sales. Inventory was turned over 8 times during the year, and the DSO, or average
collection period, was 36 days. The firm had fixed assets totaling Rs.40,000. Flamingo's payables deferral period is 30 days.
a) Calculate Flamingo's cash conversion cycle.
b) Assuming Flamingo holds negligible amounts of cash and marketable securities, calculate its total assets turnover and
ROA.
c) Suppose Flamingo's managers believe that the inventory turnover can be raised to 10 times. What would Flamingo's
cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 10 for 1995?
[TU 058]
WB 8.6
Given,
Sales for 1995 = 180,000 (on credit)
Net profit = 5% or Rs.9,000
Cost of goods sold = 85% of sales
Inventory turnover ratio = 8 times
RCP/DSO/ACP = 36 days
Fixed assets = Rs.40,000
PDP = 30 days
a) Cash conversion cycle = ICP + RCP – PDP
 = 45 + 36 – 30 = 51 days
Working note
ICP = = = 45 days
b) To find out the total assets turnover and ROA, we need to find out the total assets and net income.
Total assets = Current assets + Fixed assets
Now, for current assets, finding inventory and receivables to add in negligible amount of cash and marketable securities
(i.e.Rs.”0”):
We know that,
Inventory turnover =
or, 8 =
 Inventory = = Rs.19,125
DSO =
or, 36 days =
 Receivable = Rs.18,000
Now,
Current assets = Cash and marketable securities + Inventory + Receivable
= 0 + Rs.19,125 + Rs.18,000 = Rs.37,125
Then,
Total assets = Current assets + Fixed assets
= Rs.37,125 + Rs.40,000 = Rs.77,125
i) Total assets turnover = = = 2.33 times
ii) ROA = = = = 11.67%
c) Inventory turnover = 10 times
New cash conversion cycle = ?
ROA =?
Total assets turnover =?
Now,
New ICP = = = 36 days
Therefore,
i) Cash conversion cycle = ICP + RCP – PDP
= 36 + 36 – 30 = 42 days
ii) Calculating total assets turnover, firstly, by finding total assets.
Total assets = Current assets (Cash & Marketable securities + Inventory + Receivable) + Fixed assets
Now,
Calculating inventory
Inventory = = = Rs.15,300
Therefore,
Total assets = 0 + Rs.15,300 + Rs.18,000 + Rs.40,000
= Rs.73,300
Total assets turnover = = 2.46 times
iii) ROA = = = 12.88%

BH 15.3
Medwig Corporation has a DSO of 17 days. The company averages Rs.3,500 in credit sales each day. What are the
company’s average accounts receivable?

BH 15.3
Given,
DSO = 17 days
Credit sales = Rs.3,500 each day
Average account receivable = ?
We know that,
DSO = =
Therefore,
Receivable = DSO × Average daily credit sales = 17 days × 3,500 = Rs.59,500

BH 15.8
The Zocco Corporation has an inventory conversion period of 75 days, a receivable collection period of 38 days, and a
payables deferral period of 30 days.
a) What is the length of the firm’s cash conversion cycle?
b) If Zocco’s annual sales are Rs.3,421,875 and all sales are on credit, what is the firm’s investment in accounts receivable?
c) How many times per year does Zocco turnover its turnover?

BH 15.8
Given,
Inventory conversion period (ICP) = 75 days
Receivable collection period (RCP) = 38 days
Payable deferral period (PDP) = 30 days
a) Cash conversion cycle = ICP + RCP – PDP = 75 + 38 – 30 = 83 days
b) Sales = Rs.3,421,875
RCP =
or, 38 =
 Receivable = Rs.356,250
c) Inventory turnover = = = 4.87 times