Garrett Industries turns over its inventory 7 times each year; it has an average
ID: 2655375 • Letter: G
Question
Garrett Industries turns over its inventory 7 times each year; it has an average collection period of 36 days, and an average payment period of 31 days. The firm's annual sales are $3.1 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.
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 6 days
2. speeds the collection of accounts receivables by an average of 8 days.
3. Extends the average payment period by 8 days.
C. If the firm pays 9% for its resource investment, by how much, if anything, could it increase its annual profit as a result of the changes in part b?
D. If the annual cost of achieving the profit in part c is $34,000, what action would you recommend to the firm? why?
Explanation / Answer
Answer:A (a) AAI = 365 days ÷ 7 times inventory = 52.14 days
Operating Cycle = AAl + ACP
= 52.14 days + 36 days = 88.14 days
Cash Conversion Cycle = OC APP
= 88.14 days 31 days = 57.14 days
Resource needed= (total annual outlays ÷ 365 days) × CCC = [$31,000,00 ÷ 365] × 57.14
= $485298.63
Answer:B 1. shortens the average age of inventory by 6 days
Operating Cycle = AAl + ACP
= 46.14 days + 36 days = 82.14 days
Cash Conversion Cycle = OC APP
= 82.14 days 31 days = 51.14 days
Resource needed= (total annual outlays ÷ 365 days) × CCC = [$31,000,00 ÷ 365] × 51.14
= $434339.73
2. speeds the collection of accounts receivables by an average of 8 days.
Operating Cycle = AAl + ACP
= 52.14 days + 28 days = 80.14 days
Cash Conversion Cycle = OC APP
= 80.14 days 31 days = 49.14 days
Resource needed= (total annual outlays ÷ 365 days) × CCC = [$31,000,00 ÷ 365] × 49.14
= $417353.42
3. Extends the average payment period by 8 days.
Operating Cycle = AAl + ACP
= 52.14 days + 36 days = 88.14 days
Cash Conversion Cycle = OC APP
= 88.14 days 39 days = 49.14 days
Resource needed= (total annual outlays ÷ 365 days) × CCC = [$31,000,00 ÷ 365] × 49.14
= $417353.42
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