Question #67532
sales are $10 million, its cost of goods sold is 75% of annual sales,
and its average collection period is twice as long as its inventory
conversion period. The firm buys on terms of net 30 days, and it pays
on time. Its new CFO wants to decrease the cash conversion cycle by 10
days, based on a 365-day year. He believes he can reduce the average
inventory to $647,260 with no effect on sales. By how much must the
firm also reduce its accounts receivable to meet its goal in the
reduction of the cash conversion cycle?
Expert's answer
Answer on Question #67532 - Economics - Accounting
Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?
Answer:
Summarize raw data in the table:
Reduction in A/R = Orig. A/R - New A/R = $2,000,000 - $1,863,014 = $136,986
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