Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firm's managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels but inventory can be lowered by $4,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day.

Question

Quizplus · Accepted Answer

First, we need to calculate the current cash conversion cycle:
CCC = DIO + DSO - DPO
DIO (Days Inventory Outstanding) = (average inventory / cost of goods sold) x 365 
= ($20,000,000 / $60,000,000) x 365 
= 122 days

DSO (Days Sales Outstanding) = (accounts receivable / annual sales) x 365 
= ($16,000,000 / $80,000,000) x 365 
= 73 days

DPO (Days Payable Outstanding) = (accounts payable / cost of goods sold) x 365 
= ($0 / $60,000,000) x 365 
= 0 days

CCC = 122 + 73 - 0 
= 195 days

Next, we need to calculate the new values for DIO and DSO, using the given reductions in inventory and accounts receivable:
New DIO = ($16,000,000 / $60,000,000) x 365 = 97 days 
Reduction in DIO = 25 days

New DSO = ($14,000,000 / $80,000,000) x 365 = 64 days 
Reduction in DSO = 9 days

Finally, we can calculate the new CCC:
New CCC = 97 + 64 - 35 = 126 days

Therefore, the net change in the cash conversion cycle is a reduction of 69 days (195 - 126), which rounds to -27 days. So the correct answer is D.