Multiple changes in cash conversion cycle - Garrett Industries turns over its inventory 5 times each year; it has an a
Posted: Wed Apr 06, 2022 9:04 am
Multiple changes in cash conversion cycle - Garrett Industries
turns over its inventory 5 times each year; it has
an average collection period of 40 days and an average
payment period of 28 days. The firm's annual sales
are $3.4 million. Assume there is no difference in the
investment per dollar of sales in inventory, receivables,
and payables; and 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 8 days.
(3) Extends the average payment period by 8 days.
c. If the firm pays 16% for its
resource investment, by how much, if anything,
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
$36,000, what action would you recommend to
the firm? Why?
turns over its inventory 5 times each year; it has
an average collection period of 40 days and an average
payment period of 28 days. The firm's annual sales
are $3.4 million. Assume there is no difference in the
investment per dollar of sales in inventory, receivables,
and payables; and 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 8 days.
(3) Extends the average payment period by 8 days.
c. If the firm pays 16% for its
resource investment, by how much, if anything,
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
$36,000, what action would you recommend to
the firm? Why?