Reference no: EM132544150

Case Study:

To overcome the obstacles entailed by such situation, the marketing department has done an intensive research and suggested to launch an aggressive 10-year marketing campaign whereby the payment period to wholesale customers is extended from 30 to 60 days, together with other marketing strategies, leading to (forecasted) increase in sales of 21,900 bikes per year. While the bikes are selling at $620/unit on average, DuraBike can purchase its material from its supplier at $300/bike and is liable to pay its supplier in 60 days on average. Manufacturing and selling the bikes takes a total of 25 days on average. To accommodate the increase in demand due to the campaign, DuraBike would need to buy new machines costing $16,000,000 today, with a lifetime of 10 years (assume straight-line depreciation and 'zero' salvage value). Moreover, the marketing campaign will involve a cash cost of $4,000,000 per year.

Question 1: What are the impacts on operating cycle and cash conversion cycle due to the increase in the payment period (i.e., average collection period) from 30 to 60 days? Also, assuming the company is currently selling 100 bikes per day, by how much should the firm increase or reduce its working capital financing to accommodate to this change in average collection period?