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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
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
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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