Changing the cash conversion cycle: Camp Manufacturing turns over its inventory
ID: 2756823 • Letter: C
Question
Changing the cash conversion cycle: Camp Manufacturing turns over its inventory five times each year, has an average payment period of 35 days, and has an average collection period od 60 days. The firm hs annual sales of $3.5 million and cost of goods sold of $2.4 million.
A). Calculate the firms’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 average age of inventory from 73 days to 63 days, by how much would it reduce its dollar investment in working capital?
Explanation / Answer
A) Firms Operating cycle = Days Inventory outstanding+Days sales outstanding-Days payable outstanding
Days Inventory outstanding = Average inventory / cost of sales per day
=( Cost of goods sold/Inventory turnover ratio) / (Cost of sales/365)
= ($2400000/5) / ($2400000/365)
= $480000/6575.34
= 73
Days sales outstanding = Average accounts receivable/Net sales per day
=[(Average collection period*Credit sales)/365] / (3500000/365)
= [(60*3500000)/365] / 9589.04
= (575342.466)/9589.04
= 60
Days payable outstanding = Average accounts payable / cost of sales per day
=[ ( Average payment period *Net credit purchases)/365]/6575.34
= [(35*2400000)/365]/6575.34
=35
Firms Operating cycle = 73+60-35
= 98
B) Inventory Turnover ratio = Annual sales/ year end inventory
5 = $ 3.5 million/ year end inventory
Dollar value of Year end inventory = 0.7 million
C)
Average age of inventory= average inventory * 365/ cost of sales
73= 480000*365/2400000
63= x * 365/2400000
X = 63*2400000/365 = 414247
Revised average invemtory= 414247
Change in inventory= 480000-414247 = 65753
Average change in dollar value of working capital= $ 65753
working capital decreases by $ 65753 due to decrease in cureent assets(Inventory)
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