Question

King Manufacturing turns its inventory 9.1 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm’s annual sales are $72 million, its cost of goods sold represents 50% of sales, and its purchases represent 80% 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 firm’s total resources invested in its CCC.
c. Assuming that the firm pays 14% to finance its resource investment in its CCC, how much would it save annually by reducing its CCC by 20 days if this reduction were achieved by shortening the average age of inventory by 10 days, shortening the average collection period by 5 days, and lengthening the average payment period by 5 days?
d. If the 20-day reduction in the firm’s CCC could be achieved by a 20-day change in only one of the three components of the CCC, which one would you recommend? Explain.


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  • CreatedMarch 26, 2015
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