CASE STUDY TITLE:

CASA DE DESINO

A.) Synopsis
Offering unique design to ones home and/or apartment makes Casa de Diseno more
appealing and attractive to consumers. Casa de Diseno, located in California, is a company that
specializes in a furniture line called Ligne Moderna. Most of its furniture is built by special
orders. Distribution of these orders is through arrangements with retail stores. What makes it
more interesting is that the company virtually eliminates the use of wood. It mainly uses plastics
and metals, making wood just a decoration.
Late in 2001, Casa de Diseno entered the industry of plastic furniture under the brand
name Futuro. Futuro has been very successful, accounting for nearly 40% of Casas sales and
profits in 2006. The product is distributed through wholesalers. The firm anticipates additions to
this line (Futuro line) and promotes efforts to expand its market of plastic furniture.
In order for Casa de Diseno to expand its operations, it needs to study carefully its working
capital and liabilities management policies.
B. Case View Point
MBA Student
C .Statement of the Problem
How can the management improve their cash position?
What is the impact of changing the firms credit terms to evaluate its management of accounts
receivable?
D. Statement of the Objectives
1. Optimize the operating cycle of the business.
2. Establishing the viability of offering cash discount to clients.
3. Find other available sources of financing

E. Statement of the Areas of Consideration

1. Evaluating the working capital management of the firm by computing the operating cycle,
cash conversion cycle, and resource investment needed.

2. Comparing the firms OC, CCC, and resource investment with the industry standards
3. Evaluate the effect of offering a cash discount.

F. Statement of Alternative Courses of Action

1. Evaluating the working capital management of the firm by computing the operating cycle,
cash conversion cycle, and resource investment needed.
a.) Operating Cycle= Average Age of Inventory+ Average Collection Period
110 days + 75 days= 185 days
Cash Conversion Cycle= Operating Cycle-Average Payment Period
185 days-30 days=155 days
Resources needed= total annual outlays/360 days x Cash Conversion Cycle
=$26, 5000, 00/360 x 155 = $ 11,409,722.00
b.) Industry Operating Cycle= 83 days+ 75 days = 158 days
Cash Conversion Cycle= 158days- 39 days= 119 days
Resources needed= $26,500,000/360 x 119= $8,759,722
2. Comparing the firms OC, CCC, and resource investment with the industry standards
Casa de Diseno: Negotiated financing
$11, 409,722
Less: Industry Resources needed
8,759,722
$ 2,650,000
Cost of inefficiency:
$2,650,000 x.15 = $ 397,500
3. Evaluate the effect of offering a cash discount.
Assume the following:
Average investment in accounts receivable assuming cash discount:
New Average collection period =45 days ($40,000,000 x.80)/(360/45) = $4,000,000
Average investment in accounts receivable assuming no cash discount:
(40,000,00 x.80)/9360/75)= $6,666,667
Reduction in investment in accounts receivable: $6,666,667-$4,000,000= $2,666,667
Annual savings: $2,666,667 x.15 = $400,000
Reduction in bad debt expense: = $40,000,000 x (.02-.015) = $200,000
Cost of offering cash discount =
($540,000)
ASFRIAR
400,000
ASFRIBDE
200,00
Savings due to cash discount
$ 60,000

Based on the computation things to be considered qualitatively is that the increase in demand
for furniture due to the increase in value for dollars. This was because of the increase in the
purchasing power of the consumers. We should also consider the seasonality in demand, ie.
Christmas, weddings. etc. Since some of the products of Casa was only by special order,
demand is a vital factor for them.
G. Conclusion
Foremost, the firm could address the issue of handling its inventory by turning its inventory as
quickly as possible provided that there would be no stock outs. The second issue that the firm
also wants to solve is with regards to its average payment period. Since its APP is higher than
that of the industries, the firm can extend its payment period in order to first use the cash in
other business operations. But even the firm would pay slowly; it should not damage its credit
rating.The last concern area for Casa de Diseno is its average collection period.. The firm
basically wants to collect its accounts receivables as quickly as possible without losing sales, if
feasible. This was addressed by the option of offering the cash discount. After analyzing both
qualitative and quantitative factors, we have concluded that Ms. Leal should bring working
capital measures in line with the industry. Also, the company should also initiate the proposed
cash discount.
H. Recommendation
Casa de Decino needs to minimize the length of its OC, CCC and the amount of resources. And
stretching APP, so that Casa would again use the money for other activities. Having a positive
value for its savings on cash discount implies that the firm would benefit from it. Although the
sales decrease, its effects were compensated by the reduction of investment and bad debts.
Other recommendation in case of financing sources both unsecured resources such as: Shortterm self-liquidating bank loans, Single payment bank notes , Line of credit , Revolving credit
agreement , Commercial paper and Secured Sources such as: Pledging accounts , Factoring
accounts receivable , Floating inventory liens , Trust receipt inventory, Warehouse receipt loans