Question

Camp Manufacturing turns over its inventory 5 times each? year, has an average payment period of 32 ?days, and has an average collection period of 59 days. The firm has annual sales of ?$3.3 million and cost of goods sold of ?$2.3 million.???(Use a? 365-day year.)

a.??Calculate the? firm's 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 average age of its inventory from 73 days to 63 ?days, by how much would it reduce its dollar investment in working? capital?

Answer #1

a) Days of inventory held = 365/Inventory turnover = 365/5 = 73 days

Operating cycle = Average collection period + Days of inventory held = 59 + 73 = 132 days

Cash Conversion cycle = Average collection period + Days of inventory held - Average payment period

= 59 +73 - 32 = 100 days

b) Dollar value of inventory = COGS/Inventory turnover = 2,300,000/5 = $460,000

c) New Inventory turnover =365/63

New Dollar value of inventory = 2,300,000/(365/63) = $396,986.30

Reduction in working capital = $460,000 - $396,986.30 = $63,013.7

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Problem 16-11
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