Cash conversion cycle: American Products is concerned about managing cash effici

Question

Cash conversion cycle: American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts recievable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Cost of goods sold are $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 howmanagement might be able to reduce the cash conversion cycle.

Show all calculations.

Explanation / Answer

Answer: A. Calculation of the firm's operating cycle.

OC=AAI+ACP

OC=90+60

OC= 150 days

Answer: B Calculation of the firm's cash conversion cycle.

CCC=OC-APP

CCC=150-30

CCC= 120 days

Answer: C Calculation of the amount of resources needed to support the firm's cash conversion cycle.

Answer:d Management might be able to reduce the cash conversion cycle by reducing the amount of resources being invested into it. This could be the result of reducing the average collection period by 1 week’s time. Example: ($30,000,000 x 53/365) = $4,356,164 i.e a reduction of $575,342 in resources tied up in the CCC. Management could also reduce the CCC by increasing the average payment period by 5 days, allowing more cash to remain with the company. Example: ($15,000,000)x(35/365) = $1438356 i.e a reduction of $129,041 tied up in the CCC.

Inventory ($20,000,000) x (90/365) $4,931,507 Add: Accounts receivable ($30,000,000 x 60/365) $4,931,506 - Accounts Payable ($15,000,000) x (30/365) $1,232,877.00 Resources Invested $11,095,890

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.