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Kraaifontein manufacturing turns its inventory 9.1 times each year, has an average payment period of 35 days, and has an average collection period of...
Kraaifontein manufacturing turns its inventory 9.1 times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The company's annual sales are R72 million, its cost of goods sold represents 50 percent of sales, and its purchases represent 80 percent of cost of goods sold. Assume a 365-day year.
Required:
8.1. Calculate the company's operating cycle (OC) and cash conversion cycle (CCC).
8.2. Calculate company's total resources invested in its CCC.
8.3. Assume the company pays 14 percent to finance its resource investment in its CCC, how much would it save annually by reducing its CCC by 20 days if this reduction were achieved by shortening the average age of inventory by 10 days, shortening the average collection period by five days, and lengthening the average payment period by five days?
8.4. If the 20-day reduction in the company's CCC could be achieved by a 20-day change in only one of the three components of the CCC, which one would you recommend? Explain.
