Calculate the company’s operating cycle (OC) and cash conversion cycle (CCC).

Kraaifontein manufacturing turns its inventory 9.1times 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 R72million, its cost of goods sold represents 50% of sales, and its purchases represent 80% of cost of goods sold. Assume a 365 day year.

  1. Calculate the company’s operating cycle (OC) and cash conversion cycle (CCC).
  2. Calculate the company’s total resources invested in its CCC
  3. Assume the company pays 14% to finance its resources 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 10days, shortening the average collection period by 5 days and lengthening the average payment period by 5 days?
  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 CCC, which one would you recommend? Explain?
 

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