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Operating cycle and cash conversion cycle

Camp Manufacturing turns over its inventory 8 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 3.5 million dollars. 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 operating cycle and cash conversion cycle.

b) calculate the firms daily cash operating expenditure. How much in resources must be invested to support its cahs conversion cycle?

c) If the firm pays 14% for these resources, by how much would it increase its annual profits by favorably changing its current cash conversion cycle by 20 days?

Solution Preview

a) calculate the firm's operating cycle and cash conversion cycle.

Operating cycle = Inventory Days + Receivable Days
We are given the inventory turnover
Inventory Days = 365/Inventory turnover = 365/8 = 45.625 days
Receivable days = 60 days (the average collection period)
Operating cycle = 45.625+60 = ...

Solution Summary

The solution explains the calculations relating to operating cycle and cash conversion cycle.

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