Question

camp manufacturing turns over its inventory 5 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. the firm has an annual sales are $3.5 million. and cost of good sold of $2.4 million a. Calculate the firms operating cycle and cash conversion cycle. b. What is the dollar value of inventory held by the firm? c. If the firm could reduce the avarage age of its inventory from 73 days to 63 days, by how much would it reduce it's dollar investment in working capital?

Answer 1

SOLUTION Calculation of Operating Cycle and Cash Conversion Cycle Operating Cycle [Average Collection Period + Days Inventory Outstanding] 365 Operating Cycle60- Operating Cycle - 133 days Cash Conversion Cycle [Operating Cycle - Average Payable Period] Cash Conversion Cycle = | 60+1 365 35 Cash Conversion Cycle - 98 days Calculation of Dollar Value COGS Dollar Value - Inventory Turnover Dollar Value- S2,400,000 Dollar Value - $480,000

Calculation of Dollar Investment in Working Capital 365 63 New Inventory Tumover Ratio - - - 5.80 $2,400,000 New Dollar Value of Inventory Dollar Investment in Working Capital Dollar Value - New Dollar Value] Dollar Investment in Working Capital [S480,000 - S413,793.10] Dollar Investm ent in Working Capital - S66,206.9 $413,793.10 5.80