Operational Inefficiency

Operational Inefficiency

Introduction

The report will analyze the case of Casa de Diseno by focusing on the operating and cash conversion cycle of the company. The report will compare the operating and cash conversion cycle of the company with the industry averages. The report will also provide recommendation to Teresa Leal that should she offer the cash discount policy to company's customers or not.

Casa de Diseno

Question no # 1-A

Operating Cycle = Days Sales Outstanding + Days Inventory Held

Days Sales Outstanding

75

Days Inventory Held

110

OC (days)

185

cash conversion cycle = Days Sales Outstanding + Days Inventory Held - Days payable outstanding

Days Payable Outstanding

30

CCC (days)

155

Required Resource Investment

Total amount required for resource investment

$ 11,409,722

Casa de Diseno

Question no # 1-B

Operating Cycle = Days Sales Outstanding + Days Inventory Held

Days Sales Outstanding

75

Days Inventory Held

83

OC (days)

158

cash conversion cycle = Days Sales Outstanding + Days Inventory Held - Days payable outstanding

Days payable outstanding

39

CCC (days)

119

Resource investment

Total amount required for resource investment

$ 8,759,722.00

Casa de Diseno

Question no # 1-C

Cost of Operational Inefficiency

Amount in $

Investment require for Casa de Diseno

11,409,722

Investment require on industry averages

8,759,722

Operational inefficiency

2,650,000

Interest on resource investment

15%

Cost of operational inefficiency

397,500

Casa de Diseno

Question no # 1-D

Offering Credit Term

Operating Cycle

Current collection period

75

Credit term will reduce collection period by

40%

New Days Sales Outstanding

45

Days Inventory Held

83

OC

128

Cash Conversion Cycle

Days payable outstanding

39

CCC

89

Resources required (needed)

6,551,389

Additional savings in resource investment costs

Resources needed in efficient condition

8,759,722

Resources needed under credit term

6,551,389

Savings in resource investment costs

2,208,333

Interest on resource investment

0.15

Additional savings in resource investment cost

331,249.95

Casa de Diseno

Question no # 1-D

Cash Discount

Sales

40,000,000

Discount percentage

3%

Customers expected to take cash discount

45%

Reduction in firm's annual revenues

540,000

Casa de Diseno

Question no # 1-D

Reduction in A/R investment's & annual savings

New collection period

45

Accounts receivable under cash discount

Firm's sales (credit)

40,000,000

Accounts receivable under cash discount

4,000,000

Accounts receivable without cash discount

Collection period

75

Firm's sales (credit)

40,000,000

Accounts receivable without cash discount

6,666,667

Decline in A/R investments

Accounts receivable without cash discount

6,666,667

Accounts receivable under cash ...