Question

Adong's Fishing Products is analyzing the performance of its cash management. On average, the firm holds inventory for 65 days, pays its suppliers in 35 days, and collects its receivables in 15 days. The firm has a current annual outlay of $1,960,000 on operating cycle investments. Adong currently pays 10 percent for its financing. (Assume a 360-day year.) (a) Calculate the firm's cash conversion cycle. (b) Calculate the firm's operating cycle. (c) Calculate the daily expenditure and the firm's annual savings if the operating cycle is reduced by 15 days.

Answer 1

Answer:

A. $45

B. $80

C. $8,167

Explanation:

(a) Calculation to determine the firm's cash conversion cycle

Cash conversion cycle=$65 +$15 – $35

Cash conversion cycle=$45

Therefore the firm's cash conversion cycle is $45

(b) Calculation to determine the firm's operating cycle

Operating cycle =$65 +$15

Operating cycle=$80

Therefore the firm's operating cycle is $80

(c) Calculation to determine the daily expenditure and the firm's annual savings if the operating cycle is reduced by 15 days

First step is to calculate the Daily expenditure

Daily expenditure =$1,960,000/360

Daily expenditure=$5,444.44

Now let determine the Annual savings

Annual savings =$5,444.44 *15*0.10

Annual savings=$8,167

Therefore the daily expenditure and the firm's annual savings if the operating cycle is reduced by 15 days will be $8,167