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accounts payable showed that its average payment period is 30 days.
Leal consulted industry data and found that the industry average
payment period was 39 days. Investigation of six California furniture
manufacturers revealed that their average payment period was also
39- days. Next, Leal studied the production cycle and inventory
policies. Casa de Diseno tries not to hold any more inventory than
necessary in either 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 Diseno 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 Diseno were to offer credit terms of 3/10 net
60, the average collection period could be reduced by 40 percent.
Casa de Diseno 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 2012.
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 Diseno’s cash conversion cycle. (Note:
Assume a 365-day year and that the operating –cycle investment per
dollar of payables, inventory, and receivables is the same.) To Do A.
Assuming a constant rate for purchases, production, and sale
throughout the year, what are Casa de Diseno’s existing operating
cycle (OC), cash conversion cycle(CCC), and resource investment
need? B. If Leal can optimize Casa de Diseno’s operating cycle (OC),
cash conversion cycle (CCC), and resource investment need to be
under these more efficient condition? C. In terms of resource
investment requirements, what is the cost of Casa de Diseno’s
Operational inefficiency? D. (1) If in addition to achieving industry