Your firm has annual sales of 11 million. Cost of goods sold represent 85percent

Question

Your firm has annual sales of 11 million. Cost of goods sold represent 85percent of this value and purchases are 80 percent of cost of goods sold. Your firm has an AAI (Average Age of Inventory) of 60 days, an APP (Average Payment Period) of 25 days, and an ACP (Average Collection Period) of 45 days. What total amount of resources has your firm invested in its cash conversion cycle?

Your firm has annual sales of 11 million. Cost of goods sold represent 85percent of this value and purchases are 80 percent of cost of goods sold. Your firm has an AAI (Average Age of Inventory) of 60 days, an APP (Average Payment Period) of 25 days, and an ACP (Average Collection Period) of 45 days. What is your firm's OC (operating cycle)?

Explanation / Answer

Part A)

The total amount of resources invested in cash conversion cycle is calculated as follows:

Total Amount of Resources = (Sales)*(Cost of Goods Sold Percentage)*(Average Age of Inventory/365) + Sales*(Average Collection Period/365) - (Sales)*(Cost of Goods Sold Percentage)*(Purchase Percentage)*(Average Payment Period/365)

_______

Using the values provided in the question, we get,

Total Amount of Resources = 11,000,000*85%*60/365 + 11,000,000*45/365 - 11,000,000*85%*80%*25/365 = $2,380,822

_______

Part B)

The formula for calculating operating cycle is given below:

Operating Cycle = Average Age of Inventory + Average Collection Period

_______

Using the values provided in the question, we get,

Operating Cycle = 60 + 45 = 105 days

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