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Multiple changes in cash conversion cycleGarrett Industries turns over its inventory
5
times each year; it has an average collection period of
38
days and an average payment period of
25
days. The firm's annual sales are
$3.2
million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and 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
5
days.
(2) Speeds the collection of accounts receivable by an average of
11
days.
(3) Extends the average payment period by
11
days.
c.If the firm pays
16%
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?
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