The ACME Toy Company has the following information: 1. Inventory conversion of 1
ID: 2754823 • Letter: T
Question
The ACME Toy Company has the following information: 1. Inventory conversion of 120 days. 2. Credit terms to its customers of 30 days. 3. Purchase terms of 30 days. 4. ACME's annual purchases are $1,200,000.00 a. Calculate the operating and cash conversion cycles for ACME. b. If ACME extended its purchase terms to 45 and 60 days, how much would it save, assuming a 5% interest rate. The ACME Toy Company has the following information: 1. Inventory conversion of 120 days. 2. Credit terms to its customers of 30 days. 3. Purchase terms of 30 days. 4. ACME's annual purchases are $1,200,000.00 a. Calculate the operating and cash conversion cycles for ACME. b. If ACME extended its purchase terms to 45 and 60 days, how much would it save, assuming a 5% interest rate.Explanation / Answer
Cash conversion Cycle = inventory period + account receivable period – account payable period
= 120 + 30 – 30 = 120 Days or 2 months
Interest Expense: Revenue * Interest Rate * Cash Conversion Cycle
Current Scenario - $1,200,000 * 0.05 * (120/365) = $19,726.02
In 45 Days Scenario - $1,200,000 * 0.05 * [(120 + 30 – 45) /365] = $17,260.27
So Total Savings = $19,726.02 - $17,260.27 = $2,465.75
In 60 Days Scenario - $1,200,000 * 0.05 * [(120 + 30 – 60) /365] = $14,794.52
So Total Savings = $19,726.02 - $14,794.52 = $4,931.5
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