Domos Corporation turns its inventory five times each year, has an average payme

Question

Domos Corporation turns its inventory five times each year, has an average payment period of 25 days, and has an average collection period of 32 days. The firm’s annual sales are $3.6 billion, its cost of goods sold represents 80% of sales, and its purchases represent 50% of the cost of goods sold. Assume a 365-day year.

(a)Calculate the firm’s operating cycle and cash conversion cycle.

(b)Calculate the firm’s total resources invested in the firm’s CCC. [Hint: calculate the amount of resources invested in each asset/liability at any given point in time.]

(c)Assume that the firm pays 18% to finance its resource investment. By how much could the firm increase its annual profits if (1) it reduced its CCC by 12 days and (2) this reduction were solely the result of extending its average payment period by 12 days?

(d)If part (c)’s 12-day reduction in the firm’s CCC could alternatively have been achieved by shortening either the average age of inventory or the average collection period by 12 days, would you have recommended one of those actions rather than the 12-day extension of the average payment period specified in part (c)? Which change would you recommend? Explain.

Explanation / Answer

Average Inventory Average Inventory( Cost Of Goods Sold /Inventory Turnover) 0.576 Cost Of Goods Sold 3.6*.80 2.88 AAI (Average Inventory/ Cost Of Goods Sold/365) 73 ACP Given 32 Days APP Given 25 Days OC Operating Cycle (AAI+ACP) =73+32 105 days CCC OC -APP 105-25 80 days In Billions Average Inventory =+(3.6*0.8)/5 0.576 Account Receivables =3.6*(32/365) 0.316 Less Account Payable =+(3.6*0.8*0.5)*(25/365) 0.099 Resources Invested TOTAL 0.793 Reduced CCC By 12 days In Billions Resources Invested 0.793 Fiance Cost =+B15*0.18 0.143 Revised recourses invested =0.793*72/80 0.713 Revised Fiance cost 0.128 Increase In net profit 0.014

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