Question

Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $45,625,000, or $125,000 a day on a 365-day basis. The firm's cost of goods sold is 60% of sales. On average, the company has $7,500,000 in inventory, $5,750,000 in accounts receivable, and $2,750,000 in accounts payable. Its CFO has proposed new policies that would result in a 25% reduction in both average inventories and accounts receivable, and a 10% increase in average accounts payable. She also anticipates that these policies would reduce sales by 5%. What effect would these policies have on the company's cash conversion cycle?

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Answer 1

The cash conversion cycle reduces from approximatley 109 days to 73 days. DIO and DSO both have reduced and DPO have Increased.