a) If I collect my accounts receivables every 38 days, pay my accounts payable e
ID: 2669347 • Letter: A
Question
a) If I collect my accounts receivables every 38 days, pay my accounts payable every 35 days, and my inventory turns over 8.4 times per year, what is my cash conversion cycle?
b) A firm has fixed operating costs of $175,000, total sales revenue of $3,000,000 and total variable costs of $2,250,000. Determine the firm’s degree of operating leverage.
c) Calculating a range, which asset is more risky?
Asset A Asset B
A 14% 16%
B 20% 20%
C 25% 25%
Explanation / Answer
a) Cash conversion cycle is 46 days Cash conversion cycle = Inventory conversion period + Receivable conversion period - Payables conversion period = 43+38-35 = 46 days Note: Inventory conversion period: since the inventory turnover is 8.4 times, inventory conversion period = 365/8.4 = 43 days b) Degree of Operating Leverage (DOL) = 1.30 DOL = Total contribution / (Total contribution - Fixed cost) = 750,000 / (750,000-175,000) = 750,000 / 575,000 = 1.30 Note: Total contribution = Total Sales - Total vairable cost c) Asset A is riskier since it has a greater range (25-14 = 11). Since it has a greater range, variation tends to be higher as compared to the returns on asset B.
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