Cash conversion cycle American Products is concerned about managing cash efficie

Question

Cash conversion cycleAmerican Products is concerned about managing cash efficiently. On the average, inventories have an age of 85 days, and accounts receivable are collected in 54 days. Accounts payable are paid approximately 33 days after they arise. The firm has annual sales of about $40 million. Cost of goods sold are $22 million, and purchases are $16 million.

a.Calculate the firm's operating cycle.

b.Calculate the firm's cash conversion cycle.

c.Calculate the amount of resources needed to support the firm's cash conversion cycle.

d.Discuss how management might be able to reduce the cash conversion cycle.

Round all answers two decimal places

Explanation / Answer

Operating cycle                     =    Average age of inventories + Average collection period

= 85 days + 54 days

=    139 days answer

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b.         Cash Conversion Cycle        =    Operating cycle - Average payment period

CCC =    139 days - 33 days

=    106 days answer

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c.

Amount of resources needed to support the firm's cash conversion cycle =

Sales * Receivable age / 365 + Cost of Good sold * Inventory age / 365 – Purchases * Payables age / 365

= 40000000 *54/365 + 22000000*85/365 - 16000000*33/365

= 9594520.55

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d.         Shortening either the average age of inventory or the average collection period, lengthening the average payment period, or a combination of these can reduce the cash conversion cycle.

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