American Products is concerned about managing cash efficiently. On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Assume there is no difference in the investment per dollar of sales in inventory, receivables, and payables; and a 365-day year.
1. Calculate the firm's operating cycle.
2. Calculate the firm's cash conversion cycle.
3. Calculate the amount of resources needed to support the firm's cash conversion cycle.
4. Discuss how management might be able to reduce the cash conversion cycle
2). Accounts receivable changes without bad debts
Tara's Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara's products is $60 per unit and that the variable costs are $55 per unit. The firm is considering an accounts receivable change that will result in a 20% increase in sales and a 20% increase in the average collection period. No change in bad debts is expected The firm's equal-risk opportunity cost on its investment in accounts receivable is 14%. (Note: Use a 365-day year.)
1. 'Calculate the additional profit contribution from new sales that the firm will realize if it makes the proposed change.
2. What marginal investment in accounts receivable will result?
3. Should the firm implement the proposed change? What other information would be helpful in your analysis?
4. 4 Calculate the cost of the marginal investment in accounts receivable.