Verbrugge Corporation is a leading U.S. producer of automobile batteries. Verbrugge turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Verbrugge allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.
a. What is the length of Verbrugge’s cash conversion cycle?
b. If Verbrugge always produces and sells 1,500 batteries a day, what amount of working capital must it finance?
c. By what amount could Verbrugge reduce its working capital financing needs if it was able to stretch its payables deferral period to 35 days?
d. Verbrugge’s management is trying to analyze the effect of a proposed new production process on the working capital investment. The new production process would allow Verbrugge to decrease its inventory conversion period to 20 days and to increase its daily production to 1,800 batteries. However, the new process would cause the cost of materials and labor to increase to $7. Assuming the change does not affect the receivables collection period (40 days) or the payables deferral period (30 days), what will be the length of the cash conversion cycle and the working capital financing requirement if the new production process is implemented?