Cyree Inc. has annual sales of $80,000,000; its average inventory is $20,000,000
ID: 2643018 • Letter: C
Question
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 next 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.
Please show detailed solutions! Thank You!
Explanation / Answer
Cash Conversion Cycle = DIO + DSO - DPO Days Inventory Outstanding (DIO): How many days it takes to sell the entire inventory DIO = Average inventory/COGS per day Days Sales Outstanding (DSO): Number of days needed to collect on sales and involves AR. DSO = Average AR / Revenue per day Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. DPO = Average AP/COGS per day Current CCC Average inventory = $20,000,000 Average AR = $16,000,000 Average revenue per day = 80,000,000
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