Bradbury Corporation turns its inventory five times each year, has an average payment period of 25 days, and has an average collection period of 32 days. The firm’s annual sales are $3.6 billion, its cost of goods sold represents 80% of sales, and its purchases represent 50% of cost of goods sold. Assume a 365-day year.
a. Calculate the firm’s operating cycle (OC) and cash conversion cycle (CCC).
b. Calculate the total resources invested in the firm’s CCC.
c. Assuming that the firm pays 18% to finance its resource investment, how much would it increase its annual profits by reducing its CCC by 12 days if this reduction were solely the result of extending its average payment period by 12 days?
d. If part (c)’s reduction in the firm’s CCC could alternatively have been achieved by shortening either the average age of inventory or the average collection period by 12 days, would you have recommended one of those actions rather than the 12-day extension of the average payment period specified in part (c)? Which change would you recommend? Explain.