Oliver Corporation produces sports batteries.
Oliver turns out 1,500 batteries a day at a cost of $5 per battery for materials and labor. It takes the firm 24 days to convert raw materials into a battery. Oliver 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.
What is the length of Oliver's cash conversion cycle?
1. 34 Days
At a steady state in which Oliver produces 1,500 batteries a day, what amount of
working capital must it finance?
2. $255.000
By what amount could Oliver reduce its working capital financing needs if it was able
to stretch its payables deferral period to 36 days? Round your answer to the nearest cent.
3. $45,000
Oliver's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Oliver to decrease its inventory conversion period to 15 days and to increase its daily production to 2,000 batteries. However, the new process would cause the cost of materials and labor to increase to $11. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented? Round your answers to two decimal places.
4. Cash conversion cycle ____________Days
5. Working capital financing $______________