Business, 04.11.2019 23:31 lovemusic4

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 an annual sales are $3.5 million. and cost of good sold 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 avarage age of its inventory from 73 days to 63 days, by how much would it reduce it's dollar investment in working capital?

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Answer from: jazzwok

a) Operating cycle = 133 days

Cash conversion cycle = 98 days

b) The the dollar value of inventory held by the firm is $480.000.

c) The working capital would be reduced by 10% if the average age of its inventory from 73 days to 63 days.

Explanation:

a) The operating cycle is the average time period between the acquisition of inventory and the receipt of cash from the inventory's sale.

The cash conversion cycle is similar tothe the operating cycle, but it takes into account the average payment period of the firm.

The inventory age is equal to the average number of days that products pass between purchase and sale, equal to the ratio between the number of days of the year and the number of times the inventory turns over annually.

Operating cycle = Average inventory age+Average collection period

Operating cycle = (365/5) + 60 = 73 + 60 = 133 days

Cash conversion cycle = Average inventory age+Average collection period-Average payment period

Cash conversion cycle = 73 + 60 - 35 = 98 days

b) If the annual cost of good sold is $2.4 million and the inventory turns over 5 times a year, the average inventory has a value of $480.000.

$V=\$ 2.4M/5=\$ 0.48M$

c) To calculate the effect of reducing the average age of inventory in working capital, we calculate the cas conversion cycle for the new situation:

Cash conversion cycle = 63 + 60 - 35 = 88 days

If we calculate the ratio between the new cash conversion cycle and the former one, we can estimate the reduction in working capital:

R=88/98=0.9

We can say that the working capital would be reduced by 10% if the average age of its inventory from 73 days to 63 days.

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