Question

Merican Products is concerned about managing cash efficiently. On the​ average, inventories have an age of 9090 ​days, and accounts receivable are collected in 6060 days. Accounts payable are paid approximately 3030 days after they arise.
The firm’s operating-cycle investments are $30 million per year.Cost of goods sold are $20 million, and purchases are $15 million.

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.

Answer 1

Answer:

a. operating cycle = 150 days

b. cash conversion cycle = 120 days

c. $9 863 013.70

d. decrease the period that stock stays on hand. Decrease the time debtors pay back debt. Increase time firm takes to pay off debts.

Explanation:

a. Operating cycle = inventory period + accounts receivable period

  = 90 days + 60 days

  = 150 days

it takes almost 5 months.

b. cash conversion cycle = number of days of inventory + number of days of receivables – number of days of payables

  = 90 days + 60 days – 30 days

  = 120 days

This cycle is 3 months long.

c. Amount needed to support the cash conversion cycle

= (annual sales / 365) * cash conversion cycle

= ($30 million / 365 ) * 120 days

= $82191.78082* 120 days

= $9 863 013.70

d. there are at least 3ways that a business can decrease its cash conversion cycle.  

1. collect receivables faster by offering discounts to debtors who repay early

2. decrease number of days inventory on hand by having sales and discounts on stock

3. extend the payables period by having a good relationship with suppliers