This case is designed to offer a comprehensive review of working capital management and policy issues. Greatest emphasis is on the cash conversion cycle and associated computations, but collections and credit policy are covered conceptually and a related EOQ problem is included in the case questions.
1. Determine Cranston’s average production cycles for 2009 and 2010.
2. Determine Cranston’s average collection cycles for 2009 and 2010. Assume that all sales are credit sales.
3. Determine Cranston’s average payment cycles for 2009 and 2010.
4. Using your answers to Questions 1 through 3, determine Cranston’s cash conversion cycles for 2009 and 2010.
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 days. What steps can Cranston take to encourage clients to pay on time? What is the potential risk of implementing penalties for late payment?
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.
a) What would be the length of Cranston’s collection cycle under this new policy?
b) In dollars, how much would the policy have cost Cranston in 2010?
c) If this policy had been in effect during 2010, by how many days would the cash conversion cycle have been shortened?
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?
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?