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# Selected+study+guide-problem_solutions - SU 5 , 6 , 7 , 8

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  SOLUTIONS TO PROBLEMS QUESTIONS IN THE FIN3702 STUDY GUIDE Study unit 5: The Cash Conversion Cycle Question 6 Given facts: Accounts receivable = R2 000 000  AAP = 30 days Inventory = R5 000 000  Average daily sales = R100 000 CCC = AAI + ACP – APP Step 1: Determine the average age of inventory (AAI)  Average age of inventory = days50000R100000000R5 salesDaily Inventory ==  Step 2: Determine Accounts receivable period (ACP)  Accounts receivable period = days20000R100000000R2 salesDaily sReceivable ==  Step 3: CCC = AAI + ACP – APP CCC = 50 days + 20 days – 30 days = 40 days Question 7 Please note that in the absence of the “cost of goods sold”, the sales value can be used to approximate the levels of inventory if we assume that all “material” produced is sold off in sales.  Average age of inventory (AAI) = ntorySales/Invedays365   Annual sales = R2 000 000 x 12 months = R24 000 000 Inventory of half of monthly sales = 000000R12000000R2 =  Therefore AAI = days15.2000000000/R1000R24 days365 =    Question 8 CCC = AAI + ACP – APP; If, ACP = 60 days; APP = 45 days and AAI = 72 days CCC = 72 days + 60 days – 45 days = 87 days. Question 9 Calculate each of the respective components of the Cash Conversion Cycle.  As mentioned above, the sales value can be used to calculate the inventory movements in the absence of the cost of goods sold figure.  Average age of inventory (AAI) = salesDaily inventoryCurrent   AAI = days73000/365R600000R120 =   Average collection period (ACP) = salesDaily receivable Accounts   ACP = days96000/365R600808R157 =   Average payment period (APP) = purchasesDaily payable Accounts   APP = days25000/365R365000R25 =  CCC = AAI + ACP – APP CCC = 73 days + 96 days – 25 days = 144 days.  Question 10 CCC = AAI + ACP – APP This question requires you to determine the change in the CCC from one arrangement to another. Please note that since the accounts payable remain unchanged, we can ignore them as part of the calculation. Therefore using CCC old  and CCC new  and considering that CCC = AAI + ACP – X CCC old  = CsalesDaily receivableaccount Average salesDaily inventory Average ++  CCC old  = C000R100000000R8 000R100000000R12 ++ = 200 days CCC new  = C0.90]x 000[R100 0.80]x 000000[R8  0.90]x 000[R100 *0.80]x 000000[R12 1 ++ = 178 days * 1  the 20% decline in inventory means that only 80% of the current value is applicable. The same argument applies to the rest of the calculations above. Change in the CCC = New CCC – Old CCC Changes in CCC = 178 days – 200 days = 22 days shorter.  Study unit 6: Inventory Management Question 4 Re-order point = days of lead time x daily usage Days of lead time = 15 days + 40 days = 55 days 40 days are required to carry 250 tons of steel 1 day = usage)daily (thetons6.25 40tons250  ==  Reorder point = 55 days x 6.25 = 343.75 tons ≈ 344 tons Question 5 EOQ = 86332863.3532 0.5012)x 000(150x R150x 2  COx Sx 2 **** ≈==   **** Please take note of the need to ensure that all variables are equated to annual figures before you do the correct calculation. The value of usage (S) is quoted per month! Question 7 Firm’s EOQ. EOQ = 83326832.2226 0.20x 20004401x R100x 2  COx Sx 2 ≈==   Question 8 Total cost = 2Q x CQS x O  =+  2)x (0.2x 2833R26 R100x 833260004401 +   = R5 366.60 + R5 366.53 = R10 733 or ≈  R10 733 Question 9 Grunwuld Electronics EOQ = 1753174.93 0.20x R25R200x 000126x 2  COx Sx 2 ≈==  
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