G 2 P15-2 Changing cash comversion cyde Camp Manufacturing turns over its invent
ID: 2436888 • Letter: G
Question
G 2 P15-2 Changing cash comversion cyde Camp Manufacturing turns over its inventory five , has an average paymen times each year, has an average pa yment period of 35 days, and has an average col- lection period of 60 days. The firm has annual sales of $3.5 million and cost of goods sold of $2.4 million a. Calculate the firm's operating cyde and ash conversion cycle b. What is the dolar value of inventory held by the firm If the firm could reduce the average age of its inventory from 73 days to 63 days and cash consersion cycle by how much would i reduce its dollar investment in working capitalExplanation / Answer
days sales outstanding
365/inventory turnover ratio
365/5
73
average collection period
60
average payment period
35
cash cycle
days sales in inventory + average collection period - average payment period
73+60-35
98
operating cycle
days sales in inventory + average collection period
73+60
133
value of inventory in millions
cost of goods sold/inventory turnover ratio
2.4/5
0.48
investment in inventory when average days in inventory is 73
average days in inventory = 365 / inventory turnover ratio = inventory turnover ratio = 365/73
365/73
5
value of inventory = cost of goods sold/inventory turnover ratio
2.4/5
0.48
investment in inventory when average days in inventory is 63
average days in inventory = 365 / inventory turnover ratio = inventory turnover ratio = 365/63
365/63
5.793651
value of inventory = cost of goods sold/inventory turnover ratio
2.4/5.79
0.414508
reduction in working capital in millions
.48 - .414
0.066
days sales outstanding
365/inventory turnover ratio
365/5
73
average collection period
60
average payment period
35
cash cycle
days sales in inventory + average collection period - average payment period
73+60-35
98
operating cycle
days sales in inventory + average collection period
73+60
133
value of inventory in millions
cost of goods sold/inventory turnover ratio
2.4/5
0.48
investment in inventory when average days in inventory is 73
average days in inventory = 365 / inventory turnover ratio = inventory turnover ratio = 365/73
365/73
5
value of inventory = cost of goods sold/inventory turnover ratio
2.4/5
0.48
investment in inventory when average days in inventory is 63
average days in inventory = 365 / inventory turnover ratio = inventory turnover ratio = 365/63
365/63
5.793651
value of inventory = cost of goods sold/inventory turnover ratio
2.4/5.79
0.414508
reduction in working capital in millions
.48 - .414
0.066
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