Leal determined that the industry standard as

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Unformatted text preview: y more inventory than necessary in either I 668 raw materials or finished goods. The average inventory age was 110 days. Leal determined that the industry standard, as reported in a survey done by Furniture Age, the trade association journal, was 83 days. Casa de Diseño sells to all of its customers on a net-60 basis, in line with the industry trend to grant such credit terms on specialty furniture. Leal discovered, by aging the accounts receivable, that the average collection period for the firm was 75 days. Investigation of the trade association’s and California manufacturers’ averages showed that the same collection period existed where net-60 credit terms were given. Where cash discounts were offered, the collection period was significantly shortened. Leal believed that if Casa de Diseño were to offer credit terms of 3/10 net 60, the average collection period could be reduced by 40 percent. Casa de Diseño was spending an estimated $26,500,000 per year on operating-cycle investments. Leal considered this expenditure level to be the minimum she could expect the firm to disburse during 2004. Her concern was whether the firm’s cash management was as efficient as it could be. She knew that the company paid 15 percent annual interest for its resource investment. For this reason, she was concerned about the financing cost resulting from any inefficiencies in the management of Casa de Diseño’s cash conversion cycle. Required a. Assuming a constant rate for purchases, production, and sales throughout the year, what are Casa de Diseño’s existing operating cycle (OC), cash conversion cycle (CCC), and resource investment needs? b. If Leal can optimize Casa de Diseño’s operations according to industry standards, what will Casa de Diseño’s operating cycle (OC), cash conversion cycle (CCC), and resource investment need be under these more efficient conditions? c. In terms of resource investment requirements, what is the cost of Casa de Diseño’s operational inefficiency? d. (1) If in addition to achieving industry standards for payables and inventory, the firm can reduce the average collection period by offering credit terms of 3/10 net 60...
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