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    P13-1 Cash Conversion Cycle and Operating Cycle for American Products

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    P13-1 Cash conversion cycle American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 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 operating cycle.
    b. Calculate the firm's cash conversion cycle.
    c. Calculate the amount of resources needed to support the firm's cash conversion
    cycle.
    d. Discuss how management might be able to reduce the cash conversion cycle.

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    Solution Preview

    Please see the attached file

    a. Calculate the firm's operating cycle.

    Operating cycle = Average age of inventories
    OC + Average collection period
    = 90 days + 60 days
    = 150 days

    b. ...

    Solution Summary

    This solution provides calculations for the firm's operating cycle, cash conversion cycle, and resources needed. It also provides two recommendations for reducing the cash conversion cycle.

    $2.19

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