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Ihe $30 Million.: Arise. Purchases Operating

The document discusses calculating and reducing a firm's cash conversion cycle. It provides examples for three companies - American Products, Camp Manufacturing, and Garrett Industries. It asks to calculate operating cycles, cash conversion cycles, resource needs, and the impact of changing collection, payment, and inventory periods. Management could reduce the cash conversion cycle by shortening inventory, collection, and payment periods to free up capital.

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Raibatul Adawiyah
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240 views1 page

Ihe $30 Million.: Arise. Purchases Operating

The document discusses calculating and reducing a firm's cash conversion cycle. It provides examples for three companies - American Products, Camp Manufacturing, and Garrett Industries. It asks to calculate operating cycles, cash conversion cycles, resource needs, and the impact of changing collection, payment, and inventory periods. Management could reduce the cash conversion cycle by shortening inventory, collection, and payment periods to free up capital.

Uploaded by

Raibatul Adawiyah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Cash conversion cycle American Prolucts is concerned about managing h effi

Ciently, Onaverage, inventories have an ape of 80 davs. and accounts receivaDic a e


collected in 40 days. Accounts pavable are
naid approximately 30 days after iey
firm has annual sales of about
arise. Ihe $30 million. Goods sold total $20 million,
and purchases are $15 million.
a. Calculate the firm's
operating cycle,
b. Calculate the firm's cash conversion cycle.
C. Calculate the amount of resources needed to support the firm's cash conversion cycle
d. Discuss how management
might be able to reduce the cash conversion cycle
P15-2 Changing cash conversion cycle Camp Manufacturing turns over its inventory
times each year, has an average payment period of 35 days, and has an average
collection period of 60 days. The firm has annual sales of $3.5 million and cost ot
goods sold of $2.4 million.
a. Calculate the firm's cycle.
operating cycle and cash conversion
b. What is the dollar value of inventory held by the firm?
c. If the firm could reduce the average age of its inventory from 73 days to 63 days,
by how much would it reduce its dollar investment in working capital?

P15-3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory
6 times each year; it has an average collection period of 45 days and an average pay-
ment period of 30 days. The firm's annual sales are $3 million. Assume there is no
difference in the investment per dollar of sales in inventory, receivables, and pay
ables, and assume a 365-day year.
a. Calculate the firm's cash conversion cycle, its daily cash operating expenditure,
and the amount of resources needed to support its cash conversion cycle.
b. Find the firm's cash conversion cycle and resource investment requirement if it
makes the following changes simultaneously.
(1) Shortens the average age of inventory by 5 days.
(2) Speeds the collection of accounts receivable by an average of 10 days.
Extends the average payment period by 10 days.
(3)
c. If the firm pays 13% tor its resource investment, by how much, if anythine.
could it increase its annual profit as a result of the changes in part b?
d. If the annual cost of achieving the profit in part c is $35,000, what action would

you recommend to
the firm? Why?

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