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Excelsior College: MBA program Principles of Managerial Finance 13th Edition 2012 -Casa de Dise

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Question;Excelsior College: MBA program Principles of Managerial Finance 13th Edition 2012 Authors: Lawerence J. Gitman, Chad J. Zutter ISBN-13: 978-0-13-611946-3 Read the following case study from your textbook: ? Casa de Dise?o (p. 672) Review the textbook topicsrelated to the case study. Based on your analysis of the case study, respond to the following: ? Assuming a constant rate for purchases, production, and sales throughout the year, what are Casa de Dise?o?s existing operating cycle (OC), cash conversion cycle(CCC), and resource investment need? ? If Leal can optimize Casa de Dise?o?s operations according to industry standards, what will the company?s operating cycle (OC), cash conversion cycle (CCC), and resource investment need to be under these more efficientconditions? ? In terms of resource investment requirements, what is the cost of Casa de Dise?o?s operational inefficiency? Answer the following: ? If in addition to achieving industry standards for payables and inventory, the firm can reduce the average collectionperiod by offering credit terms of 3/10 net 60, what additional savings in resource investment costs will result for the shortened cash conversion cycle, assuming that the level of sales remains constant? ? If the firm?s sales (all on credit) are $40,000,000and 45% of the customers are expected to take the cash discount, by how much will the firm?s annual revenues reduce as a result of the discount? ? If the firm?s variable cost of $40,000,000 in sales is 80%, determine the reduction in average investment inaccounts receivable and the annual savings that will result from this reduced investment, assuming that sales remain constant. ? If the firm?s bad-debt expenses decline from 2% to 1.5% of sales, what annual savings will result, assuming the sales remain constant?? On the basis of your analysis, what recommendations would you offer Teresa Leal?Integrative Case 7Casa de DisenoInJanuary 2012,TeresaLealwas namedtreasurerofcasadeDiseflo.she decidedthatshecouldbestorientherself by systematically examiningeach areaofthecompany'sfinancialoperations.Shebeganby studying thefirm'sshort-term financialactivities.CasadeDisefloislocatedinSouthernCaliforniaandspecializesinafurnitureline called"LigneModerna."ofhighqualityand contemporarydesign,thefurnitureappealsto the customerwhowants something uniqueforhisorherhomeorapartment.MostLigneModerna furnitureisbuiltbyspecialorderbecause awidevarietyofupholstery,accenttrimming,and colorsisavailable. Theproductlineisdistributed throughexclusivedealership arrangemenrswithwell-establishedretailstores'CasadeDiseflo's manufacturingprocessvirtuallyeliminates theuseofwood.Plastic and metal provide thebasicframework,andwoodis usedonlyfordecorarivepurposes.casadeDisefro enteredtheplastic-furnituremarketinlate 2004. The companymarkets itsplastic-furnitureproductsasindoor-outdooritems under the brandname"Futuro."Fururo plasticfurnitureemphasizescomfort,durabilityandpracticalityandisdistributed throughwholesalers. TheFuturolinehasbeenverysuccessful,accountingfornearly 40 percent of thefirm'ssalesandprofits in2011.CasadeDiseflo anticipatessomeadditions ro theFuturoline andalso somelimitedchangeof direction initspromotion inaneffort toexpand the applicationsoftheplasticfurniture.Lealhas decidedtostudy thefirm'scash management practices.To determinetheeffectsofthesepractices,shemustfirstdetermine the current operating andcashconversioncycles.Inher investigations,shefoundthatCasadeDiseflopurchasesallofitsrawmaterials andproductionsuppliesonopenaccount. The companyisoperatingatproductionlevelsthatprecludevolume discounts.Mostsuppliers donotoffercashdiscounts, andCasadeDiseflo usuallyreceivescredit terms of net 30.AnanalysisofcasadeDiseflo'saccountspayableshowedthatitsaveragepaymenrperiodis30days.Leal consultedindustrydata and foundthattheindustryaveragepayment period was 39days.InvestigationofsixCalifornia furnituremanufacturersrevealedthattheiraveragepayment periodwas also39days.Next,Leal studiedtheproductioncycleandinventorypolicies. casadeDisefrotriesnot to holdany moreinventorythannecessaryineitherrawmaterialsor finishedgoods.Theaverageinventoryagewas 110days.Leal determinedthattheindustrystandard,asreportedinasurveydonebyFurnitureAge,thetradeassociationjournal,was83 days.casadeDisefiosellsto all ofitscustomersonanet-60basis,inlinewiththeindustrytrendtograntsuchcredit terms onspecialtyfurniture.Lealdiscovered,byagingtheaccounts receivable,thattheaveragecollection periodforthefirmwas75days.Investigationofthetradeassociation'sandCaliforniamanufacturers'averagesshowedthatthesamecollection periodexistedwhere net-60 creditterms were given.Where cashdiscounts were offered,thecollection periodwassignificantlyshorlned.LealbelievedthatifcasadeDiseflo weretooffer credit termsof3/10 net 60,theaveragecollection period couldbereducedby40percent. Customer: replied 2 day ago. Part two of Case AnalysisCasadeDiseflowas spending anestimated $26,500,000 per year on operatingcycleinvestments. Lealconsideredthis expenditureleveltobetheminimumshecouldexpectthefirmtodisburseduring2012.Herconcernwaswhether the firm'scash management wasasefficientasitcouldbe.Sheknewthatthe company paid15percent annual interestforitsresourceinvestment. For thisreason,shewasconcernedabout the financingcostresultingfromany inefficienciesinthemanagementofCasadeDiseflo'scashconversioncycle.(No/e:Assume a365-dayyearandthatthe operating-cycle investment perdollarofpayables,inventory, andreceivablesisthesame.)TODOa.Assumingaconstantrateforpurchases,production,andsalesthroughouttheyear,whatare CasadeDiseflo's existing operatingcycle(OC),cashconversioncycle (CCC), andresourceinvestmentneed?b.IfLealcanoptimizeCasadeDiseflo's operations accordingto industrystandards,whatwillCasadeDiseflo's operating cycle (OC),cashconversioncycle(CCC),andresourceinvestmentneedtobeunderthesemore efficient conditions?c.Intermsofresourceinvestment requirements,whatisthecostofCasadeDisefro'soperational inefficiency?d.(1)Ifin addition toachievingindustrystandardsforpayablesandinventorSthefirmcan reducetheaveragecollection period by offering credit termsof3110net 60,what additionalsavingsinresourceinvestmentcostswillresultfromtheshortenedcashconversioncycle, assumingthatthelevelofsalesremainsconstant?(2)Ifthefirm'ssales(all on credit)are$40,000,000and45"/o of thecustomersare expectedtotakethe cashdiscount, byhowmuchwillthefirm'sannualrevenuesbereducedas aresult of thediscount?(3)Ifthefirm'svariablecostofthe $40,000,000insalesis807o,determinethereductionintheaverageinvestmentinaccounts receivableand the annualsavingsthatwillresultfromthisreducedinvestment,assumingthatsalesremainconstant.(4)Ifthefirm'sbad-debtsexpensesdeclinefrom2Y,to-1..5"/oofsales,whatannualsavingswillresult,assumingthatsalesremainconstant?(5)Useyourfindingsinparts (2)through(4)toassesswhetherofferingthecashdiscountcanbejustifiedfinancially.Explain whyorwhynot.e.Onthebasisofyouranalysisinpartsathroughd,whatrecommendationswouldyouofferTeresa Leal?f.ReviewforTeresaLealthe keysourcesofshort-term financing, other thanaccountspayable,thatshemay considerfor financingCasa deDiseflo'sresourceinvestmentneedcalculatedinpart b.Besuretomentionbothunsecured andsecuredsources.Integrative Case 7Casa de DisenoInJanuary 2012,TeresaLealwas namedtreasurerofcasadeDiseflo.she decidedthatshecouldbestorientherself by systematically examiningeach areaofthecompany'sfinancialoperations.Shebeganby studying thefirm'sshort-term financialactivities.CasadeDisefloislocatedinSouthernCaliforniaandspecializesinafurnitureline called"LigneModerna."ofhighqualityand contemporarydesign,thefurnitureappealsto the customerwhowants something uniqueforhisorherhomeorapartment.MostLigneModerna furnitureisbuiltbyspecialorderbecause awidevarietyofupholstery,accenttrimming,and colorsisavailable. Theproductlineisdistributed throughexclusivedealership arrangemenrswithwell-establishedretailstores'CasadeDiseflo's manufacturingprocessvirtuallyeliminates theuseofwood.Plastic and metal provide thebasicframework,andwoodis usedonlyfordecorarivepurposes.casadeDisefro enteredtheplastic-furnituremarketinlate 2004. The companymarkets itsplastic-furnitureproductsasindoor-outdooritems under the brandname"Futuro."Fururo plasticfurnitureemphasizescomfort,durabilityandpracticalityandisdistributed throughwholesalers. TheFuturolinehasbeenverysuccessful,accountingfornearly 40 percent of thefirm'ssalesandprofits in2011.CasadeDiseflo anticipatessomeadditions ro theFuturoline andalso somelimitedchangeof direction initspromotion inaneffort toexpand the applicationsoftheplasticfurniture.Lealhas decidedtostudy thefirm'scash management practices.To determinetheeffectsofthesepractices,shemustfirstdetermine the current operating andcashconversioncycles.Inher investigations,shefoundthatCasadeDiseflopurchasesallofitsrawmaterials andproductionsuppliesonopenaccount. The companyisoperatingatproductionlevelsthatprecludevolume discounts.Mostsuppliers donotoffercashdiscounts, andCasadeDiseflo usuallyreceivescredit terms of net 30.AnanalysisofcasadeDiseflo'saccountspayableshowedthatitsaveragepaymenrperiodis30days.Leal consultedindustrydata and foundthattheindustryaveragepayment period was 39days.InvestigationofsixCalifornia furnituremanufacturersrevealedthattheiraveragepayment periodwas also39days.Next,Leal studiedtheproductioncycleandinventorypolicies. casadeDisefrotriesnot to holdany moreinventorythannecessaryineitherrawmaterialsor finishedgoods.Theaverageinventoryagewas 110days.Leal determinedthattheindustrystandard,asreportedinasurveydonebyFurnitureAge,thetradeassociationjournal,was83 days.casadeDisefiosellsto all ofitscustomersonanet-60basis,inlinewiththeindustrytrendtograntsuchcredit terms onspecialtyfurniture.Lealdiscovered,byagingtheaccounts receivable,thattheaveragecollection periodforthefirmwas75days.Investigationofthetradeassociation'sandCaliforniamanufacturers'averagesshowedthatthesamecollection periodexistedwhere net-60 creditterms were given.Where cashdiscounts were offered,thecollection periodwassignificantlyshorlned.LealbelievedthatifcasadeDiseflo weretooffer credit termsof3/10 net 60,theaveragecollection period couldbereducedby40percent. Part two of Case AnalysisCasadeDiseflowas spending anestimated $26,500,000 per year on operatingcycleinvestments. Lealconsideredthis expenditureleveltobetheminimumshecouldexpectthefirmtodisburseduring2012.Herconcernwaswhether the firm'scash management wasasefficientasitcouldbe.Sheknewthatthe company paid15percent annual interestforitsresourceinvestment. For thisreason,shewasconcernedabout the financingcostresultingfromany inefficienciesinthemanagementofCasadeDiseflo'scashconversioncycle.(No/e:Assume a365-dayyearandthatthe operating-cycle investment perdollarofpayables,inventory, andreceivablesisthesame.)TODOa.Assumingaconstantrateforpurchases,production,andsalesthroughouttheyear,whatare CasadeDiseflo's existing operatingcycle(OC),cashconversioncycle (CCC), andresourceinvestmentneed?b.IfLealcanoptimizeCasadeDiseflo's operations accordingto industrystandards,whatwillCasadeDiseflo's operating cycle (OC),cashconversioncycle(CCC),andresourceinvestmentneedtobeunderthesemore efficient conditions?c.Intermsofresourceinvestment requirements,whatisthecostofCasadeDisefro'soperational inefficiency?d.(1)Ifin addition toachievingindustrystandardsforpayablesandinventorSthefirmcan reducetheaveragecollection period by offering credit termsof3110net 60,what additionalsavingsinresourceinvestmentcostswillresultfromtheshortenedcashconversioncycle, assumingthatthelevelofsalesremainsconstant?(2)Ifthefirm'ssales(all on credit)are$40,000,000and45"/o of thecustomersare expectedtotakethe cashdiscount, byhowmuchwillthefirm'sannualrevenuesbereducedas aresult of thediscount?(3)Ifthefirm'svariablecostofthe $40,000,000insalesis807o,determinethereductionintheaverageinvestmentinaccounts receivableand the annualsavingsthatwillresultfromthisreducedinvestment,assumingthatsalesremainconstant.(4)Ifthefirm'sbad-debtsexpensesdeclinefrom2Y,to-1..5"/oofsales,whatannualsavingswillresult,assumingthatsalesremainconstant?(5)Useyourfindingsinparts (2)through(4)toassesswhetherofferingthecashdiscountcanbejustifiedfinancially.Explain whyorwhynot.e.Onthebasisofyouranalysisinpartsathroughd,whatrecommendationswouldyouofferTeresa Leal?f.ReviewforTeresaLealthe keysourcesofshort-term financing, other thanaccountspayable,thatshemay considerfor financingCasa deDiseflo'sresourceinvestmentneedcalculatedinpart b.Besuretomentionbothunsecured andsecuredsources.

 

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