SAN JUAN, Julia MAE - ASS-CCC PDF

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Julia Mae D.S San Juan Operating Cycle/Cash Conversion Cycle Assignment #1

1. Sharam Industries has a 120-day operating cycle. If its average age of inventory is 50 days, how long is its average collection period? If its average payment period is 30 days, what is its cash conversion cycle? Answer: Average Collection Period = 120 – 50 = 70 Cash Conversion Cycle = 50 + 70 – 30 = 90 days

2. American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables and that there is a 365-day year. a. Calculate the firm’s operating cycle. Answer:

90 + 60 = 150 days

b. Calculate the firm’s cash conversion cycle. Answer:

90 + 60 – 30 = 120 days

c. Calculate the amount of resources needed to support the firm’s cash conversion cycle. Answer:

30,000,000/365 days x 120 days = 9,863,013.70

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

Decrease the inventory age or account receivable or increase the accounts payable or expenses.

3. Camp Manufacturing turns over its inventory eight times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm’s annual sales are $3.5 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables and that there is a 365-day year. a. Calculate the firm’s operating cycle and cash conversion cycle. Inventory days = 365/8 = 45.625 Operating Cycle = 45.625 + 60 days = 105.625 days Cash Conversion Cycle = 105.625 – 35 = 70.625 days b. Calculate the firm’s daily cash operating expenditure. How much in resources must be invested to support its cash conversion cycle? Daily cash operating expenditure = 3,500,000/365 = 9,589.04 Resources = 3,500,000/365 x 70.625 days = 677,226.03 c. If the firm pays 14% for these resources, by how much would it increase its annual profits by favorably changing its current cash conversion cycle by 20 days? 9,589.04 x 14% x 20 days = 26,849.312

4. Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and assume a 365-day year. 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. CCC = 60.83 + 45 – 30 = 75.83 days Daily Cash Expenditure = 3,000,000/365 = 8,219.18

Amount of resources needed = 3,000,000/365 x 75.83 days = 623,260.27 b. Find the firm’s cash conversion cycle and resource investment requirement if it makes the following changes simultaneously. (1)Shortens the average age of inventory by 5 days. CCC = 55.83 + 45 – 30 = 70.83 days Requirement = 3,000,000/365 x 70.83 days = 582,164.38 (2)Speeds the collection of accounts receivable by an average of 10 days. CCC = 55 + 60.33 – 30 = 85.83 days Requirement = 3,000,000/365 x 85.83 days = 705,452.05 (3)Extends the average payment period by 10 days. CCC = 105.83 – 40 days = 65.83 days Requirement = 3,000,000/365 x 65.83 days = 541,068.49

c. If the firm pays 13% for its resource investment, by how much, if anything, could it increase its annual profit as a result of the changes in part b? (1) 8,219.18 x 13% x 70.83 = 75,681.39 (2) 8,219.18 x 13% x 85.83 = 91,708.79 (3) 8,219.18 x 13% x 65.83 = 70,338.92

d. If the annual cost of achieving the profit in part c is $35,000, what action would you recommend to the firm? Why? The firm should reject the proposed changes because the increase in profits exceeds the additional costs...