Garrett Industries turns over its inventory six times each year; it has the average collection period of 45 days and the average payment period of thirty days. Firm’s annual sales are $ 3 million. Suppose there is no difference in investment per dollar of sales in inventory, receivables, and payables; and a 365 day year.
a) Compute the firm’s cash conversion cycle, the amount of resources needed to support its cash conversion cycle, and its daily cash operating expenditure.
b) Determine the firm’s cash conversion cycle and resource investment needs if it makes given changes concurrently.
i) Shortens the average age of inventory by 5 days.
ii) Speeds collection of accounts receivable by the average of 10 days.
iii) Extends average payment period by ten days.
c) If firm pays 13% for its resource investment, by how much, if anything, could it raise its annual profit as the result of changes in part b?
d) If annual cost of achieving profit in part c is $ 35,000, what action would you suggest to the firm? Describe why?