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ID: 2653567 • Letter: C
Question
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Answer for subpoint a:
Average payment period =30 days.
Operating cycle =Days' Sales of inventory+Days sales outstanding.
Given Day's sales of inventory =110 days.
Days sales outstanding = 75 days.
=110 days+75 days.
=185 days.
Formula for cash conversion cycle = Days inventory outstanding+Days sales outstanding - Days payables outstanding.
=110days+75 days- 30 days
=155 days.
Answer for subpoint b:
As per industry standards Average payment period = 39 days.
Average payment period = 39 days.
Given Day's sales of inventory = 83days.
Days sales outstanding = 75 days.
Operating cycle =Days' Sales of inventory+Days sales outstanding.
=83 days+75 days.
=158 days.
Formula for cash conversion cycle = Days inventory outstanding+Days sales outstanding - Days payables outstanding.
=83 days+75 days - 39 days
=119 days.
Answer for option c:
Operating cycle of the firm =185 days
Operating cycle of the industry =158 days.
Increase in operating cycle due to inefficiency =185 - 158 =27 days.
Investment in operating cycle =$26,500,000
Excess investment in operating cycle due to inefficiency of the firm=($26,500,000/185 days)*27 days=$3,867,567.5
Cost of the excess funds=(( $3,867,567.5*15%)/365)*27
=$42,914.11
Answer for subpoint d:
1.Decrease in average colletion period due to allowing discount= 75 days*60%
=45 days.
Operating cycle =Days' Sales of inventory+Days sales outstanding.
=110 days+45 days
=155 days.
Reduction in resource investment cycle=185 days - 155 days =30 days.
Excess investment in operating cycle due to inefficiency of the firm=($26,500,000/185 days)*30 days=$4,297,297.30
Cost of the excess funds=(( $4,297,297.30*15%)/365)*30
=$52,980.38
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