Question

Edison Inc. has annual sales of $49,000,000 on a 365-day basis. The firm's cost of goods sold are 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Answer choices:

–18      days
	–20      days
	–19      days
	–17      days
	–16      days

Answer 1

	Original	New
Sales	$49,000,000	$44,100,000.0
Days	365	365
Sales/Day	$134,246.58	$120,821.92
COGS/Sales	75%	75%
COGS per day	$100,684.93	$90,616.44
Inventory	9,000,000	7200000
Accounts Receivables	8,000,000	6400000
Pay deferral period	35	35
Inventory Conversion Period	89.39	79.46
Receivables Conversion Period	59.59	52.97
Cash Converion cycle	113.98	97.43

Sales decreased by 10%

Inventory decreased by 20%

Receivables decreased by 20%

Inventory conversion period = Inventory/COGS per day

Receivables conversion period = Accounts Receivables/Sales per day

Cash conversion cycle = Inventory converison period + Receivables conversion cycle - Pay deferral period

Difference in cash converison cycle = 97.43 - 113.98

= -16.55

Thus the correct asnwer is reduction in conversion cycle by 17 days. 4th option.