14-3 Answer - P14-3 Multiple changes in cash conversion...

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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 the amount of resources needed to support its cash conversion cycle. Solution:- Computation of the Cash Conversion Cycle AAI = 365 ¸ 6 times inventory = 61 days OC = AAI + ACP = = 106 days CCC = OC - APP = 106 days - 30 days = 76 days Daily Financing = $3,000,000 / 365 = $8,219 Resources needed = Daily financing ´ CCC = $8,219 * 76 = $624,644 if it makes the following changes simultaneously. (1) Shortens the average age of inventory by 5 days. (2) Speeds the collection of accounts receivable by an average of 10 days. (3) Extends the average payment period by 10 days. Solution:- Computation of the Cash Conversion Cycle and resource are requirement OC = 55 days + 35 days = 90 days CCC = 90 days - 40 days = 50 days Resources needed = $8,219 * 50 = $410,950 Hence the Cash Conversion Cycle is 50 Days and resource are requirement is $410,950 Solution:- Computation of the Resource additional profit Additional profit = (Daily expenditure ´ reduction in CCC)*financing rate
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14-3 Answer - P14-3 Multiple changes in cash conversion...

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