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Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. Ittakes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers40 days
Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. Ittakes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers40 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 ofworking capital must it finance?c. By what amount could Prestopino reduce its working capital financing needs if it wasable to stretch its payables deferral period to 35 days?d. Prestopino’s management is trying to analyze the effect of a proposed new productionprocess on its working capital investment. The new production process would allowPrestopino to decrease its inventory conversion period to 20 days and to increase itsdaily production to 1,800 batteries. However, the new process would cause the cost ofmaterials and labor to increase to $7. Assuming the change does not affect the averagecollection period (40 days) or the payables deferral period (30 days), what will be thelength of its cash conversion cycle and its working capital financing requirement if thenew production process is implemented?
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