Whitson Co. is looking for ways to shorten its cash conversion cycle. It has ann

ID: 2754868 • Letter: W

Question

Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 65% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. 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.

Please show all work step by step

Explanation / Answer

Original

New

Annual sales

$36,500,000.00

$32,850,000.00

Days in year

365

Sales per day

$100,000.00

$90,000.00

COGS/Sales

65%

COGS per day

$65,000.00

$58,500.00

Inventory

$9,000,000.00

$7,200,000.00

Accounts receivable

$8,000,000.00

$5,760,000.00

Payables deferral period

35.00

Inventory conversion period

138.46

123.08

Average collection period

80.00

64.00

Cash conversion cycle

183.46

152.08

Reduction in cash conversion cycle = 183.46 – 152.08 = 31.38 days