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.
|COGS per day||$100,684.93||$90,616.44|
|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
Thus the correct asnwer is reduction in conversion cycle by 17 days. 4th option.
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