Question

In: Finance

Kiley Corporation had the following data for the most recent year. The new CFO believes that...

Kiley Corporation had the following data for the most recent year. The new CFO believes that an improved inventory management system could lower the average inventory by $4000, that improvements in the credit department could reduce receivables by $2000, and that the purchasing department coudl negogite better credit termsanf thereby increase accounts payable by $2000. Futhermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made by how many days would tbe cadh conversion cycle be lowered?

Original. Revised

Annual sales: $110000. $110000

unchanged

COGS: unchanged. $80000. $80000

Average inventory: $20000. $16000

lowered by $4000

Average receivables: $16000. $14000

lowered by $2000

Average payables: $10000. $12000

increase by $2000

Days in year. 365. 365

Expert Solution

Original DSO = Accounts Receivable / [Annual Sales / 365]

= $16,000 / [$110,000 / 365] = $16,000 / $301.37 = 53.09 days

Original DIO = Accounts Inventory / [COGS / 365]

= $20,000 / [$80,000 / 365] = $20,000 / $219.18 = 91.25 days

Original DPO = Accounts Payable / [COGS / 365]

= $10,000 / [$80,000 / 365] = $10,000 / $219.18 = 45.625 days

Original CCC = Original DSO + Original DIO - Original DPO

= 53.09 + 91.25 - 45.625 = 98.72 days

Revised DSO = Accounts Receivable / [Annual Sales / 365]

= $14,000 / [$110,000 / 365] = $14,000 / $301.37 = 46.45 days

Revised DIO = Accounts Inventory / [COGS / 365]

= $16,000 / [$80,000 / 365] = $16,000 / $219.18 = 73 days

Revised DPO = Accounts Payable / [COGS / 365]

= $12,000 / [$80,000 / 365] = $12,000 / $219.18 = 54.75 days

Revised CCC = Revised DSO + Revised DIO - Revised DPO

= 46.45 + 73 - 54.75 = 64.71 days

Decline in CCC = Original DSO - Revised DSO = 98.72 - 64.71 = 34.01 days

jeff jeffy answered 2 months ago

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