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Integrative Case 7: Casa de Diseño
Integrative Case 7, Casa de Diseño, 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 Diseño 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:

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