Edison Inc.has annual sales of $37,595,000,or $103,000 a day 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? Do not round intermediate calculations.Round to the nearest whole day.

Question

Quizplus · Accepted Answer

The cash conversion cycle (CCC) is calculated as Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO). Initially, DIO = (Inventory / Cost of Goods Sold) * 365, DSO = (Accounts Receivable / Sales) * 365, and DPO remains constant at 35 days. With a 20% reduction in inventory and accounts receivable and a 10% reduction in sales, the new DIO and DSO are recalculated with the reduced figures. The reduction in CCC is found by comparing the new CCC to the original CCC, resulting in a decrease of 22 days.