P14-3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory 6 times each year;

it has an averag
period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 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.
Solution:- Computation of the Cash Conversion Cycle
AAI = 365 ¸ 6 times inventory = 61 days
OC = AAI + ACP
= 61 days + 45 days
= 106 days
CCC = OC - APP
= 106 days - 30 days
= 76 days
Daily Financing = $3,000,000 / 365
= $8,219
Resources needed = Daily financing ´ CCC
= $8,219 * 76
= $624,644
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 10 days.
(3) Extends the average payment period by 10 days.
Solution:- Computation of the Cash Conversion Cycle and resource are requirement
OC = 55 days + 35 days
= 90 days
CCC = 90 days - 40 days
= 50 days
Resources needed = $8,219 * 50
= $410,950

Hence the Cash Conversion Cycle is 50 Days and resource are requirement is $410,950
c. If the firm pays 13% for its resource investment, by how much, if anything,
could it increase its annual profit as a result of the changes in part b?
Solution:- Computation of the Resource additional profit
Additional profit = (Daily expenditure ´ reduction in CCC)*financing rate
= ($8,219 ´ 25) ´ 0.13
= $26,712

Hence the Resource additional profit is $26,712

d. If the annual cost of achieving the profit in part c is $35,000, what action would
you recommend to the firm? Why?
Solution:
From the above calculation we should Reject the proposed techniques because from the costs ($35,000) and the exceed savin
6 times each year; it has an average collection

, and payables; and a 365-day year.

sts ($35,000) and the exceed savings ($26,712).
P14-3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory 6 times each year; it has an averag
period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 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.

AAI = 365 days in a year inventory turn over 6 times

= 61
OC = AAI + ACP APP
= 61 days + 45 days 30
= 106 Given in question
CCC = OC - APP * Formuals are placed in the soultion
= 106 days - 30 days
= 76
Daily Financing = $3,000,000 / 365
= $ 8,219.18
Resources needed = Daily financing ´ CCC
= $8,219 * 76
= $ 624,644.00

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 10 days.
(3) Extends the average payment period by 10 days.

OC = 55 days + 35 days
= 90
CCC = 90 days - 40 days
= 50
Resources needed = $8,219 * 50
= $ 410,950.00

C. If the firm pays 13% for its resource investment, by how much, if anything,
could it increase its annual profit as a result of the changes in part b?

Additional profit = (Daily expenditure ´ reduction in CCC)*financing rate

= ($8,219 * 25) * 0.13
= 205475
Additional profit = $ 26,711.75

D. If the annual cost of achieving the profit in part c is $35,000, what action would
you recommend to the firm? Why?
I would recommend not using we the the suggesteded techinque because the costs is ($35,000) which exceed's the savings ($
s each year; it has an average collection
on.
payables; and a 365-day year.

Formaula's

ACP AAI OC CCC

45 days of year/ turn over AAI +ACP OC-APP
Given in question Pg(685 in book) Pg(685 in book) Pg(685 in book)
als are placed in the soultion not in the work. i.e. for the AAI answer if you click on the 61 you will see the formula
which exceed's the savings ($26,712).
P14-3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory 6 times each year; it has an averag
period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 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.

AAI = 365 ¸ 6 times inventory = 61 days

each year; it has an average collection

yables; and a 365-day year.