Porta Stadium,Inc.has annual sales of $50,000,000.Its cost of goods sold equals 80 percent of sales,and the company keeps $10,000,000 of inventory on hand.On average,the firm has accounts receivable of $7,500,000.The firm buys all raw materials on credit,its trade credit terms are net 30 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 $2,000,000 and accounts receivable lowered by $833,333,what will be the net change in the cash conversion cycle? Use a 360-day year.

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Quizplus · Accepted Answer

The cash conversion cycle is calculated as Inventory Days + Receivables Days - Payables Days. Initially, Inventory Days = (10,000,000 / 40,000,000) * 360 = 90 days, Receivables Days = (7,500,000 / 50,000,000) * 360 = 54 days, and Payables Days = 30 days. The initial cash conversion cycle is 90 + 54 - 30 = 114 days. After changes, Inventory Days = (8,000,000 / 40,000,000) * 360 = 72 days, Receivables Days = (6,666,667 / 50,000,000) * 360 = 48 days. The new cash conversion cycle is 72 + 48 - 30 = 90 days. The net change is 114 - 90 = 24 days reduction.