A. Assuming a constant rate for purchases, production, and sales thro

QUESTION

A. Assuming a constant rate for purchases, production, and sales throughout the year, what are Casa de Disenos existing operating cycle (OC), cash conversion cycle (CCC), and resource investment need?
If Lean can optimize Casa de Disenos operations according to industry standards, what will Casa de Disenos operating (OC), cash conversion cycle (CCC), and resource investment need to be under these more efficient conditions? Components: DIO is computed by: Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure; Calculating the average inventory figure by adding the years beginning (previous yearend amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 to obtain an average amount of inventory for any given year; and Dividing the average inventory figure by the cost of sales per day figure. For Zimmer Holdings FY 2005 (in $ millions), its DIO would be computed with these figures: (1) cost of sales per day 739.4 365 = 2.0 (2) average inventory 2005 536.0 583.7 = 1,119.7 2 = 559.9 (3) days inventory outstanding 559.9 2.0 = 279.9 FXCM -Online Currency Trading Free $50,000 Practice Account DSO is computed by: Dividing net sales (income statement) by 365 to get net sales per day figure; Calculating the average accounts receivable figure by adding the years beginning (previous yearend amount) and ending accounts receivable amount (both figures are in the balance sheet) and dividing by 2 to obtain an average amount of accounts receivable for any given year; and Dividing the average accounts receivable figure by the net sales per day figure. For Zimmer Holdings FY 2005 (in $ millions), its DSO would be¦

puted with these figures: (1) net sales per day 3,286.1 365 = 9.0 (2) average accounts receivable 524.8 524.2 = 1,049 2 = 524.5 (3) days sales outstanding 524.5 9.0 = 58.3 DPO is computed by: Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure; Calculating the average accounts payable figure by adding the years beginning (previous yearend amount) and ending accounts payable amount (both figures are in the balance sheet), and dividing by 2 to get an average accounts payable amount for any given year; and CCC = # days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations. = Inventory conversion period Receivables conversion period Payables conversion period = Avg. Inventory COGS / 365 Avg. Accounts Receivable Credit Sales / 365 Avg. Accounts Payable Purchases / 365 The Operating Cycle of a business is a metric that calculates the average number of days it takes to recover via a final debtor collections, the cash initially outlaid for resource inputs. The Operating Cycle includes raw material purchases, inventories, conversions, sales, debtor accounts and debtor collections. the Cash Conversion Cycle emerges as interval C?D (i.e. disbursing cash?collecting cash). the payables conversion period (or œDays payables outstanding) emerges as interval A?C (i.e. owing cash?disbursing cash) the operating cycle emerges as interval A?D (i.e. owing cash?collecting cash) the inventory conversion period or œDays inventory outstanding emerges as interval A?B (i.e. owing cash?being owed cash) the receivables conversion period (or œDays sales outstanding) emerges as interval B?D (i.e.being owed cash?collecting cash Knowledge of any three of these conversion cycles permits derivation of the fourth (leaving aside the operating cycle, which is just the sum of the inventory conversion period and the receivables conversion period.) Hence, interval C ? D = interval A ? B interval B ? D interval A ? C CCC (in days) = Inventory conversion period Receivables conversion period Payables conversion period In calculating each of these three constituent Conversion Cycles, we use the equation TIME =LEVEL/RATE (since each interval roughly equals the TIME needed for its LEVEL to be achieved at its corresponding RATE). We estimate its LEVEL œduring the period in question as the average of its levels in the two balance-sheets that surround the period: (Lt1 Lt2)/2. To estimate its RATE, we note that Accounts Receivable grows only when revenue is accrued; and Inventory shrinks and Accounts Payable grows by an amount equal to the COGS expense (in the long run, since COGS actually accrues sometime after the inventory delivery, when the customers acquire it). Payables conversion period: Rate = [inventory increase COGS], since these are the items for the period that can increase œtrade accounts payables, i.e. the ones that grew its inventory. NOTICE that we make an exception when calculating this interval: although we use a period average for the LEVEL of inventory, we also consider any increase in inventory as contributing to its RATE of change. This is because the purpose of the CCC is to measure the effects of inventory growth on cash outlays. If inventory grew during the period, we want to know about it. Inventory conversion period: Rate = COGS, since this is the item that (eventually) shrinks inventory. Receivables conversion period: Rate = revenue, since this is the item that can grow receivables (sales).

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