1. Chapter 13: Working
Capital Management
Group 8:
Phan Nguyễn Phương Anh_295918
Đỗ Thị Phương Dung_295889
Nguyễn Hải Phương Hạnh_295903
Lê Thị Thanh Tâm_295897
2. 1. Determine Cranston’s average
production cycles for 2009 and 2010.
Inventory Turnover = COGS/ Avg Inventory
Production Cycle = 365/Inv Turnover
• For 2009
2,172/ ((512+388)/2)) = 4.83
365/4.83 = 76 days
• For 2010
2,568/ ((595+512)/2) =4.64
365/4.65 = 79 days
3. 2. Determine Cranston’s average collection
cycles for 2009 and 2010. Assume that
all sales are credit sales.
Receivable Turnover = Credit Sales/ Avg Acc. Rec.
Collection cycle = 365/Receivables Turnover
• For 2009
3,202/((642+320)/2) = 6.66
365/6.66=55 days
• For 2010
3,784/ ((722+642)/2) = 5.55
365/5.55 = 66 days
4. 3. Determine Cranston’s average payment
cycles for 2009 and 2010.
Payables turnover = COGS/Avg Acc Payable
Payment cycle = 365/Payables Turnover
• For 2009
2,172/ ((288+204)/2) = 8.83
365/8.83 = 41
• For 2010
2,568/ ((332+288)/2) = 8.28
365/8.28 = 44 days
5. 4. Using your answers to Questions 1 through
3, determine Cranston’s cash
conversion cycles for 2009 and 2010.
• For 2010
Business cycle = 79 + 66 = 145 days
Cash conversion cycle = 145-44 = 101 days
• For 2009
Business cycle = 76 + 55 = 131 days
Cash conversion cycle = 131-41 = 90 days
6. 5. Cranston now bills its customers on terms of net 45,
meaning that payment is due on the forty-fifth day
after the goods are shipped. Although most
customers pay on time, some routinely stretch the
payment period to sixty and even ninety day. What
steps can Cranston take to encourage clients to pay
on time? What is the potential risk of implementing
penalties for late payment?
• Cranston has both carrot and stick approaches available_ a polite reminder
call
• The company could impose penalties on late payments
• The company could also offer a discount for early payment.
• Penalties run the risk of alienating some customers who may choose to
take their business elsewhere. Cranston would need to be especially careful
not to lose very large accounts that are an important part of their business.
7. 6. Suppose Cranston institutes a policy of
granting a 1 % discount for payment within
fifteen days with the full amount due in forty-five
days (1/15,net 45). Half the customers take the
discount; the other half takes an average of
sixty days to pay.
8. a.) What would be the length of Cranston’s collection cycle under this new
policy?
The new collection period will be 15/2 + 60/2 = 47.5 days. Customers who
forego the discount will apparently take another 15 days beyond the due date.
b.) In dollars, how much would the policy have cost Cranston in 2010?
Cranston would lose 1% on half of its sales, or $3,784/2 × .01 = $18.92 million
before taxes. Since this amount would not be taxed, we can estimate the after-tax
effect as $18.92 million × (1-119.55/398.50) = approximately $13.24 million.
c.) If this policy had been in effect during 2010, by how many days would the
cash conversion cycle have been shortened?
In 2010, the collection cycle was 66 days. The new policy would shorten the
collection period, and the cash conversion cycle, by 66 – 47.5 = 18.5 days.
9. 7. An image-based lockbox system could accelerate Cranston’s
cash collections by three days. Cranston can earn an annual
rate of 6% on the cash freed by accelerated collections. Using
sales for 2010, what is the most Cranston should be willing to pay
per year for the lockbox system?
The lockbox system would free up 3 days sales
or $3,784/365 × 3 = $31.10 million dollars.
If Cranston can earn 6% on this money, the
lockbox system would be advantageous at any
cost less than $31.10 million × .06 =$1.866
million per year.
10. 8. One of Cranston’s principal raw materials is plastic
pellets, which it purchases in lots of 100 pounds at $0.35 per
pound. Annual consumption is 8,000,000 pounds. Within a
broad range of order sizes, ordering and shipping costs are
$120 per order. Carrying costs are $1.50 per year per 100
pounds. Compute the Economic Order Quantity for plastic
pellets. The pellets can only be ordered in whole lots of 100
pounds, so use 8,000,000/100 as S in Equation 13.17. If
Cranston used the EOQ model, how often would it order
pellets?
EOQ = (2 × 800,000 × 120/1.50)1/2 =11,314 lots per order.
800,000/ 11,314 = 71, so
Cranston would be placing orders every five days.
