Question

Cash conversion cycle

Cash management is a very important function of managers. Companies need to manage their operations in a way that they can sustain growth and yet not run out of cash.

Consider the case of the Red Hamster Manufacturing Corporation:

Red Hamster Manufacturing Corporation has forecasted sales of $30,000,000 for next year and expects its cost of goods sold (COGS) to remain at 60% of sales. Currently, the firm holds $3,200,000 in inventories, $2,300,000 in accounts receivable, and $2,500,000 in accounts payable.

Approximately how long does it take Red Hamster Manufacturing to convert its raw materials to its finished products and then to sell those goods? (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.)

71.38 days

64.89 days

55.16 days

51.91 days

On average, it takes    from the time a sale is made until the time cash is collected from customers.

Red Hamster Manufacturing relies on customer credit when it buys raw materials from its suppliers. On average, it takes    after the firm purchases materials before it sends cash to its suppliers. The length of Red Hamster Manufacturing’s cash conversion cycle (CCC) is     . In general, firms prefer a   CCC.

What is the length of Red Hamster Manufacturing’s cash conversion cycle (CCC)?

42.18 days

40.07 days

44.29 days

52.73 days

In general, firms prefer a _______ CCC.

Answer 1

Item Average Inventory Average Accounts receivable Average Accounts payable $ $ $ 3,200,000 2,300,000 2,500,000 Net sales Cost of goods sold $ 30,000,000 $ 18,000,000 Days sales in inventory Average collection period Average payment period Average inventoryx365.Cost of goods sold Average receivablesx365+Credit sales Average payablex365.Cost of goods sold 64.89 Days 27.98 Days 50.69 Days 92.87 Days Operating cycle Days sales in inventory+Average collection period Cash cycle Operating cycle - Average payment period In general, firms prefera lower ccc 42.18 Days

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