ABC Manufacturing historically produced products that were held in inventory until they could be sold to a customer. The firm is now changing its policy and only producing a product when it receives an actual order from a customer. All else equal,this change will:

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By only producing products when they receive orders from customers, ABC Manufacturing will no longer be holding excess inventory, which will decrease the cash cycle. The operating cycle may remain the same or decrease, depending on how quickly the firm is able to produce and deliver products to customers. Shortening the accounts payable period is unlikely since suppliers will still expect to receive payment within a certain timeframe, and lengthening the accounts receivable period is also unlikely since customers will have already made payment when placing the order. The inventory turnover ratio may increase or decrease, depending on how efficiently the firm is able to produce and sell products.

ABC Manufacturing Historically Produced Products That Were Held in Inventory