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 resource investment costs will result from the shortened cash conversion cycle, assuming that the level of sales remains constant?( 2) If the firm’ s sales( all on credit) are $ 40,000,000 and 45 % of the customers are expected to take the cash discount, by how much will the firm’ s annual revenues be reduced as a result of the discount?( 3) If the firm’ s variables cost of the $ 40,000,000 in sales is 80 %, determine the reduction in the average investment in accounts receivable and the annual savings that will result from this reduced investment, assuming that sales remain constant.( 4) If the firm’ s bad-debts expenses decline from 2 % to 1.5 % of sales, what annual savings will result, assuming that sales remain constant?( 5) Use your findings in parts( 2) through( 4) to assess whether offering the cash discount can be justified financially. Explain why or why not. E. On the basis of your analysis in parts a through d, what recommendations would you offer Teresa Leal?