During 2007, the company increase the number of days in payable from 36.5 days to 50 days. COGS was $250M in 2006 and $292M in 2007. How much will the company’s CFO change from stretching the payable? A. $15M B. $34.2M My solutions: Payable = COGS* days/365 so the increased CFO = 292/365 X (50-36.5) = 10.8M However, the answer is A, can not find where is wrong. Anyone help??!
First year AP = 36.5/365 * 250 = 25 Second year AP = 50/365 * 292 = 40 So AP increase by 15, so does CFO. In your calculation you did not take into account that COGS was changing.
I see! thanks Nicol…!!!
I got 10.8 as well. Since they’re specifically asking about the change from stretching payable, the increase in COGS shouldn’t factor into it.
Since I’m an idiot and forgot the formula for AP…i did it another way. I saw the increase in AP was 37% = (50-36.5)/36.5 I saw increase in COGS was 42MM so 37% of 42MM was attributable to the increase in AP…which also was ~15MM or Answer A. I can’t think of why this wouldn’t always work (same difference really), but i guess it’s probably better to use the intended formula. Any input?