Please note there are 3 questions and question #3 has 3 parts. I will give full

Question

Please note there are 3 questions and question #3 has 3 parts. I will give full credit to whomever answers thoroughly all 3 questions and please show your work. Thanks, greatly appreciated!

1. Char Company last year reported sales of $3,000,000 and an inventory turnover ratio of 2.50. The company is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 4.00 while maintaining the same level of sales, how much cash will be freed up?

2. What is the nomial and effective cost of trade credit under the credit terms of 2/20, net 45? Round answer to 2 decimal places, XX.XX%.

3. The High Plains Inc. has an inventory conversion period of 80 days, a receivables collection period of 31 days, and a payables deferral period of 25 days.

(a) What is the length of the firm's cash conversion cycle?

(b) If High Plains, Inc. has annual sales of $4,827,500 and all sales are on credit, what is the firm's invesment in accounts receivable?

(c) How many times per year does Zocco turn over its inventory?

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Inventory = Sales / Inventory turnover ratio

Current Scenario

Inventory = 3000000/2.5 =1200000

Proposed Scenario = 3000000/4 = 750000

Freed Up Cash = 1200000 - 750000 = 450000

Part B:

Nominal Cost of Trade Credit = Discount%/(100 - Discount %)*365/Days after the Purchase to make the Payment - Discount Period Days) = 2/(100-2)*365/(45 -20) = 29.79% or 29.80%

Effective Cost of Trade Credit = (1 + .020408)^14.6 - 1 = 34.31%

Part C:

1) Cash Conversion Cycle = Inventory Conversion Period + Average Collections Period - Average Payment Period = 80 + 31 - 25 = 86 days

2) Average Collection Period = 365/Accounts Receivables Turnover Ratio

31 = 365/Accounts Receivables Turnover Ratio

Accounts Receivables Turnover Ratio = 365/31 = 11.77

Accounts Receivables Turnovere Ratio = Net Credit Sales/Average Accounts Receivables

11.77 = 4827500/Average Accounts Receivables

Average Accounts Receivables = 4827500/11.77 = 410152.93

3) Inventory Conversion Period = 365/Inventory Turnover Ratio

80 = 365/Inventory Turnover Ratio

Inventory Turnover Ratio = 365/80 = 4.56

Thanks.

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