Garrett Industries turns over its inventory six times each year;

Garrett Industries turns over its inventory six times each year; it has an average collection 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 assume 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.

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.

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?

d. If the annual cost of achieving the profit in part c is $35,000, what action would you recommend to the firm? Why?

Cash Conversion Cycle
Cash conversion cycle measures the total time a business takes to convert its cash on hand to produce, pay its suppliers, sell to its customers and collect cash from its customers. The process starts with purchasing of raw materials from suppliers,...
Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...