Camp manufacturing turns over its inventory 5 times each year, has an average pa
ID: 2652665 • Letter: C
Question
Camp manufacturing turns over its inventory 5 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 of goods sold of $2.4 million. (Use 365-day year).
a. Calculate the firm’s operating cycle and cash conversion cycle.
b. What is the dollar value of inventory held by the firm?
c. If the firm could reduce the average age of inventory from 73 days to 63 days, by how much would it reduce its dollar investment in working capital?
Explanation / Answer
Inventory days = 365 days / Inventory turnover
= 365 days / 5
= 73 days
Receivable days = 60 days (given)
Payable days = 35 days (given)
(a) Operating Cycle = Inventory days + Receivable days
= 73 days + 60 days
= 133 days
Cash Conversion cycle = Inventory days + Receivable days - Payable days
= 73 days + 60 days - 35 days
= 98 days
(b) Dollar value of Inventory held = Inventory days / 365 * Cost of goods sold
= 73 / 365 * $2.4 million
= $0.48 million or $480,000
(c) Dollar saved = (73 - 63) / 365 * $2,400,000
= $65,753.43 ~ $65,753
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