Camp Manufacturing turns over its inventory five times each year, has an average
ID: 2761630 • Letter: C
Question
Camp Manufacturing turns over its inventory five times each year, has an average payment period of 35 days , and has an average collection period of 60 days. The firm has annual sales of $3.5 million and cost of goods sold of $2.4 million.
A. Calculate the firm'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 the average age of its inventory from 73 days to 63 days by how much would it reduce its dollar investment in working capital.
Explanation / Answer
A. Operating cycle = 365 / Inventory turnover + Average collection period
= 365 / 5 + 60
= 133 days
Cash Conversion cycle = Operating cycle - Average payable period
= 133 - 35
= 98 days
B. Dollar value of inventory held by the firm = Cost of goods sold / Inventory turnover
= $2,400,000 / 5
= $480,000
C. Reduction in working capital investment = $2,400,000 * (73 - 63) / 365
= $65,753
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