4. Brendan Ltd has annual sales of $200 million with a cost of goods sold of $15
ID: 2764767 • Letter: 4
Question
4. Brendan Ltd has annual sales of $200 million with a cost of goods sold of $150 million They keep an average inventory of $60million . On average , the firm has accounts receivable of $50 million . The firm buys all raw materials on credit , its trade credit terms are net 30 days and it pays on time . The firm buys all raw materials on credit , its trade credit terms are net 30 days and it pays on time The firm’s managers are searching foe ways to shorten the cash conversion cycle . If sales can be maintained at existing levels but inventory can be lowered by $15 million and accounts receivable can be lowered by $20 million , what will be the net change in the cash conversion cycle?(Use a 360-day year)
Explanation / Answer
Cash Conversion Cycle (CCC) = Day Inventory outstanding (DIO) + Days Sales Outstanding (DSO) – Days payable outstanding (DPO)
Day Inventory outstanding (DIO) = Average inventory / CGS per day
= $60 million / $0.41667
= $144 million
Days Sales Outstanding (DSO) = Average AR / Revenue per day
Revenue per day = $200 million/360 days = $0.5556 million
= $50 million / $0.5556 million
= $89.99 million
Days payable outstanding (DPO)
= Average AP/COGS per day
= $15 million / $0.41667
= 36
CCC = 144 + 89.99 - 36
= 197.99
Therefore, cash conversion cycle is 197.99
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.