Edison Inc. has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 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.

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period. The proposed changes reduce inventory and receivables by 20% and sales by 10%, affecting these periods. Calculating the new cycle and comparing it to the old one shows a reduction of 22 days.