Edison Inc. has annual sales of $49,000,000, or $44,100,000 a day on a 365-day b

Question

Edison Inc. has annual sales of $49,000,000, or $44,100,000 a day on a 365-day basis. The firm's cost of goods sold are 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.

a)–18 days
b)–20 days
c)–19 days
d)–17 days
e)–16 days

Explanation / Answer

COGS = 75%*44100000 =33075000 CCC = Inventory/(COGS/365) + Accounts Receivable/(Credit Sales/365) – Accounts Payable/(COGS/365) ie CCC = 9000000/(33075000/365) + 8000000/(44100000/365) - 35 = 131 days Post changes, CCC = 0.80*9000000/(0.90*33075000/365) + 0.80*8000000/(0.90*44100000/365) - 35 = 112 days So ans is 112-131 = -18 days ...................Ans (a)

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