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Lisa Pinto, vice president of finance at Roche Publishing Company

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Question;Assessing Roche Publishing Company?sCash Management EfficiencyLisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growingpublisher of college texts, is concerned about the firm?s high level of short-termresource investment. She believes that the firm can improve the management of itscash and, as a result, reduce this investment. In this regard, she charged ArleneBessenoff, the treasurer, with assessing the firm?s cash management efficiency. Arlenedecided to begin her investigation by studying the firm?s operating and cash conversioncycles.Arlene found that Roche?s average payment period was 25 days. She consultedindustry data, which showed that the average payment period for the industry was 40days. Investigation of three similar publishing companies revealed that their averagepayment period was also 40 days. She estimated the annual cost of achieving a 40-daypayment period to be $53,000.Next, Arlene studied the production cycle and inventory policies. The averageage of inventory was 120 days. She determined that the industry standard as reportedin a survey done by Publishing World, the trade association journal, was 85 days. Sheestimated the annual cost of achieving an 85-day average age of inventory to be$150,000.Further analysis showed Arlene that the firm?s average collection period was 60days. The industry average, derived from the trade association data and informationon three similar publishing companies, was found to be 42 days?30% lower thanRoche?s. Arlene estimated that if Roche initiated a 2% cash discount for paymentwithin 10 days of the beginning of the credit period, the firm?s average collectionperiod would drop from 60 days to the 42-day industry average. She also expectedthe following to occur as a result of the discount: Annual sales would increase from$13,750,000 to $15,000,000, bad debts would remain unchanged, and the 2% cashdiscount would be applied to 75% of the firm?s sales. The firm?s variable costs equal80% of sales.Roche Publishing Company is currently spending $12,000,000 per year on itsoperating-cycle investment, but it expects that initiating a cash discount will increaseits operating-cycle investment to $13,100,000 per year. (Note: The operating-cycleinvestment per dollar of inventory, receivables, and payables is assumed to be thesame.) Arlene?s concern was whether the firm?s cash management was as efficient as itcould be. Arlene knew that the company paid 12% annual interest for its resourceinvestment and therefore viewed this value as the firm?s required return. For thisreason, she was concerned about the resource investment cost resulting from any inefficienciesin the management of Roche?s cash conversion cycle. (Note: Assume a 365-day year.)To Doa. Assuming a constant rate for purchases, production, and sales throughout theyear, what are Roche?s existing operating cycle (OC), cash conversion cycle(CCC), and resource investment need?b. If Roche can optimize operations according to industry standards, what wouldits operating cycle (OC), cash conversion cycle (CCC), and resource investmentneed be under these more efficient conditions?c. In terms of resource investment requirements, what is the annual cost of Roche?soperational inefficiency?d. Evaluate whether Roche?s strategy for speeding its collection of accounts receivablewould be acceptable. What annual net profit or loss would result fromimplementation of the cash discount?e. Use your finding in part d, along with the payables and inventory costs given,to determine the total annual cost the firm would incur to achieve the industrylevel of operational efficiency.f. Judging on the basis of your findings in parts c and e, should the firm incur theannual cost to achieve the industry level of operational efficiency? Explain whyor why not.

 

Paper#44891 | Written in 18-Jul-2015

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