Changing cash conversion cycle: Camp manufacturing turns over its inventory 5 ti
ID: 2763722 • Letter: C
Question
Changing cash conversion cycle: Camp manufacturing turns over its inventory 5 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 CGS of $2.4 million.
a) Calculate the firms 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, how much would it reduce its dollar investment in working capital?
Explanation / Answer
a) Operating Cycle (OC):
= Average Age of Inventory (AAI) + Average Collection Perido (ACP)
ACP = 60 days
AAI = 365 days / 5 = 73 days
OC = 60 days + 73 days
= 133 days
Cash Conversion Cycle (CCC) :
Operating Cycle - Average Payment Period (APP)
= 133 dyas - 35 days
= 98 days
b) Dollar Value of Inventory :
Cost of Goods Sold / Inventory Turnover Ratio
= $ 2,400,000/ 5
= $ 480,000
C) Reduction of working capital if AAI is reduced from 73 days to 63 days.
Dollar Value of inventory at if AAI is 63 days = $ 2,400,000 x 63 /365 = $ 414,247
Dollar Value of inventory at if AAI is 73 days = $ 4,80,000
then, working capital reduced by ( $ 480,000 - $414,247) = $ 65,753
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