2. All questiu QUESTION ONE ries tums over its inventory 6 times each year, it h
ID: 2806726 • Letter: 2
Question
2. All questiu QUESTION ONE ries tums over its inventory 6 times each year, it has an average collection period of 45 Garrett Industries days and an average payment period of 30 days ano diference in the investment per shillings of sales in inventory, receivables, and p . The firm's annual sales are Ksh 3 million. Assume there ayables; and a 365- day year Required a. Calculate the firm's cash conversion cycle, its daily cash operating expenditure and the amount of resources needed to support its cash conversion cycle. b. Find the firm's cash conversion cycle and resource investment requirement if it makes the following changes simultaneously. i. Shortens the average age of inventory by 5 days. i. Speeds the collection of accounts receivable by an average of 10 days (3) Extends the average payment period by 10 days. e firm pays 13% for its resource investment, by how much, if anything, could it increase its annual pro c. If the pays d as a result of the changes in part (b)? l the annual cost of achieving the profit in part (c) is Ksh 535,000, what action would you recommend to the firm? Why?Explanation / Answer
Answer to Part a.
Average Age of Inventories= 365 / 6
Average Age of Inventories= 60.83 days or 61 days
Operating Cycle = Average Age of Inventories + Average Collection Period
Operating Cycle = 61 days + 45 days
Operating Cycle = 106 days
Cash Conversion Cycle = Operating Cycle – Average Payment Period
Cash Conversion Cycle = 106 days – 30days
Cash Conversion Cycle = 76 days
Daily Financing = Annual Sales / 365
Daily Financing = 3,000,000 / 365
Daily Financing = $8,219.18
Total Resources Needed = Daily Financing * Cash Conversion Cycle
Total Resources Needed = $8,219.18 * 76 days
Total Resources Needed = $624,657.68
Answer to Part b.
Operating Cycle = Average Age of Inventories + Average Collection Period
Operating Cycle = (61 – 5) days + (45 - 10) days
Operating Cycle = 91 days
Cash Conversion Cycle = Operating Cycle – Average Payment Period
Cash Conversion Cycle = 91 days – (30 + 10) days
Cash Conversion Cycle = 51 days
Daily Financing = Annual Sales / 365
Daily Financing = 3,000,000 / 365
Daily Financing = $8,219.18
Total Resources Needed = Daily Financing * Cash Conversion Cycle
Total Resources Needed = $8,219.18 * 51 days
Total Resources needed = $419,178.18
Answer to Part c.
Increase in Profits = Daily Expenditure * Reduction in Conversion Cycle * Financing Rate
Reduction in Conversion Cycle = 76 days – 51days = 25 days
Increase in Profits = $8,219.18 * 25 * 0.13
Increase in Profits = $26,712.34
Answer to Part d.
Garrett Industries should reject the recommendation, as the Increase in Profit is $26,712.34, whereas the Cost is $535,000, Which will incur losses to the firm.
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