Camp Manufacturing turns over its inventory 5 times each year, has an average pa

Question

Camp Manufacturing turns over its inventory 5 times each year, has an average payment period of 32 days, and has an average collection period of 58 days. The firm has annual sales of $3.6 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 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 = days of receivables outstanding + days of inventory on hand

  = days of receivables outstanding + 365/inventory turnover = 58 + 365/5 = 131

Cash conversion cycle = Operating cycle - average payment period = 131 - 32 = 99

B) Inventory turnover = COGS/Average inventory

5 = 2.4/Average inventory

Average inventory = $0.48 million

C) 365/inventory turnover =  days of inventory on hand

  365/inventory turnover = 63

  inventory turnover = 5.7936

Inventory turnover = COGS/Average inventory

5.7936 = 2.4/Average inventory

Average inventory = $0.48 million

=0.414246m

Decrease in inventory = 0.48 - 0.414246 = 0.065754 m which is the amount by which working capital will reduce

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