Casa de Diseno

Integrative Case 7, Casa de Diseno, involves evaluating working capital management of a furniture manufacturer. Operating cycle, cash conversion cycle, and negotiated financing needed are determined and compared with industry practices. The student then analyzes the impact of changing the firm’s credit terms to evaluate its management of accounts receivable before making a recommendation.
a. Operating cycle (OC) average age of inventory  average collection period  110 days  75 days  185 days Cash conversion cycle (CCC) OCaverage payment period 185 days30 days 155 days Resources needed   $11,253,425

B. Industry OC 83 days  75 days 158 days Industry CCC 158 days39 days 119 days Industry resources needed  $8,639,726
C. Casa de Diseno Negotiated financing $11,253,425 Less: Industry resources needed 8,639,726 $2,613,699 Cost of inefficiency: $2,613,699 ´ 0.15  $392,055
d. 1. Offering 3/10 net 60:
Reduction in collection period  75 days ´ (1  0.4)  45 days
OC  83 days  45 days  128 days
CCC  128 days39 days  89 days
Resources needed   $6,461,644
Additional savings  $8,639,726$6,461,644  $2,178,082  $2,178,082 ´ 0.15  $326,712
2. Reduction in sales: $40,000,000 ´ 0.45 ´ 0.03  $540,000
3. Average investment in accounts receivable assuming cash discount:
New average collection period  45 days
($40,000,000 ´ 0.80) ¸ (365 ¸ 45)  $3,945,205
Average investment in accounts receivable assuming no cash discount:
(40,000,000 ´ 0.80) ¸ (365 ¸ 75)  $6,575,342
Reduction in investment in accounts receivable:
$6,575,342  $3,945,205  $2,630,137
Annual savings:
$2,630,137 ´ 0.15  $ 394,521
4. Reduction in bad debt expense:
$40,000,000 ´ (0.02  0.015)  $ 200,000
5. Cost of offering cash discount ($ 540,000)
Annual savings from reduction in investment In accounts receivable 394,521
Annual savings from reduction in bad

References: Lawrence J. Gitman, & Chad J. Zutter. (2012). Principles of Managerial Finance (13th Edition). Boston: Pearson Prentice Hall.