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Multiple Changes in Cash Conversion Cycle

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Garrett Industries turns over its inventory 6 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 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 avg age of inventory by 5 days
2. Speeds the collection of accounts receivable by an average of 10 days
3. Extends the avg payment period by 10 days

c) If the firm pays 12% for its resource investment, by how much, if any, 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 $35000, what action would you recommend to the firm? Why?

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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.

Cash conversion cycle = Inventory days + average collection period - average payment period
Inventory days = 365/inventory turnover = 365/6 =61 days (rounded)
Cash conversion cycle = 61+45-30 = 76 days
Annual outlay = $3,000,000
Daily cash operating expenditure = ...

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