Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?
A) $123,630
B) $130,137
C) $136,986
D) $143,836
E) $151,027

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period. First, calculate the current inventory conversion period and receivables collection period. Then, determine the new inventory conversion period with reduced inventory and calculate the required reduction in receivables to achieve a 10-day reduction in the cash conversion cycle.