Unformatted text preview: sources, by how much would it increase its
annual profits by favorably changing its current cash conversion cycle by 20
days? LG2 14–3 Multiple changes in cash conversion cycle Garrett Industries turns over its
inventory 6 times each year; it has an average collection period of 45 days and
an average payment period of 30 days. The firm’s annual operating-cycle investment is $3 million. Assume a 360-day year.
a. Calculate the firm’s cash conversion cycle, its daily cash operating expenditure, and the amount of resources needed to support its cash conversion
b. Find the firm’s cash conversion cycle and resource investment requirement 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.
c. If the firm pays 13% for its resource investment, by how much, if anything,
could it increase its annual profit as a result of the changes in part b?
d. If the annual cost of achieving the profit in part c is $35,000, what action
would you recommend to the firm? Why? LG2 14–4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has
forecast its tot...
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