FIN 486 Expect Success/uophelp.com FIN 486 Expect Success/uophelp.com | Page 42

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 standards for payables and
inventory, the firm can reduce the average collection period by
offering credit terms of 3/10 net 60, what additional savings in