Cyree Inc.has annual sales of $80,000,000,its average inventory is $20,000,000,and its average accounts receivable is $16,000,000.The firm buys all raw materials on terms of net 35 days,and it pays on time.The firm is searching for ways to shorten the cash conversion cycle.If sales can be maintained at existing levels while lowering inventory by $4,000,000 and accounts receivable by $2,000,000,by how many days would the cash conversion cycle be changed? Use a 365-day year.
A)-27.4
B)-28.7
C)-30.2
D)-31.7

Question

Quizplus · Accepted Answer

The cash conversion cycle is calculated as: Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period. Initially, the Inventory Conversion Period is (20,000,000 / 80,000,000) * 365 = 91.25 days, and the Receivables Collection Period is (16,000,000 / 80,000,000) * 365 = 73 days. The Payables Deferral Period is 35 days. The initial cash conversion cycle is 91.25 + 73 - 35 = 129.25 days. After reducing inventory and receivables, the Inventory Conversion Period becomes (16,000,000 / 80,000,000) * 365 = 73 days, and the Receivables Collection Period becomes (14,000,000 / 80,000,000) * 365 = 63.875 days. The new cash conversion cycle is 73 + 63.875 - 35 = 101.875 days. The change is 129.25 - 101.875 = 27.375 days, approximately -27.4 days.

Cyree IncHas Annual Sales of $80,000,000,its Average Inventory Is $20,000,000,and Its