Look back in the chapter to Table, which showed the balance sheets for Argile Textiles on three different dates. Argile’s sales fluctuate during the year due to the seasonal nature of its business; however, we can calculate its sales on an average day as total sales divided by 360, recognizing that daily sales are much higher than this value during its peak selling season and much lower during its slack time. Argile’s projected sales for 2016 are $825 million, so daily sales are expected to average $2.29 million. The projected cost of goods sold for 2016 is $660 million, so daily credit costs associated with production are expected to average $1.83 million. Assume all sales and all purchases are made on credit.
a. Calculate Unilate’s inventory conversion period as of September 30, 2016, and December 31, 2016.
b. Calculate Unilate’s receivables collection period as of September 30, 2016, and December 31, 2016.
c. Calculate the payables deferral period as of September 30, 2016, and December 31, 2016.
d. Using the values calculated in parts (a) through (c), calculate the length of Unilate’s cash conversion cycle on the two balance sheet dates.
e. In part (d), you should have found that the cash conversion cycle was longer on September 30 than on December 31. Why did these results occur?
f. Can you think of any reason the cash conversion cycle of a firm with seasonal sales might be different during the slack selling season than during the peak selling season?