Question

In: Finance

Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost...

Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold are 75% of annual sales, and its receivables 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 18 days, based on a 365-day year. He believes he can reduce the average inventory to $605,885 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle? Do not round your intermediate calculations.

a.

$234,778
b.

$325,077
c.

$310,027
d.

$249,828
e.

$300,997

Solutions

Expert Solution

Original PDP = 30 days

Original ICP = 365 / [COGS / Inventory] = 365 / [(0.75 x $10,000,000) / $750,000] = 365 / 10 = 36.50 days

Original DSO = ICP x 2 = 36.5 x 2 = 73 days

DSO = 365 / [Sales / Receivables]

73 = 365 / [$10,000,000 / Original Receivables]

Original Receivables = $10,000,000 / [365 / 73] = $10,000,000 / 5 = $2,000,000

Original CCC = ICP + DSO - PDP = 36.5 + 73 - 30 = 79.50 days

New CCC = Original CCC - 18 = 79.50 - 18 = 61.50 days

New ICP = 365 / [(0.75 x $10,000,000) / $605,885] = 365 / 12.38 = 29.49 days

New PDP = 30 days

New DSO = New CCC + New PDP - New ICP = 61.5 + 30 - 29.49 = 62.01 days

DSO = 365 / [Sales / Receivables]

62.01 = 365 / [$10,000,000 / New Receivables]

New Receivables = $10,000,000 / [365 / 62.01] = $10,000,000 / 5.89 = $1,699,002.65

Reduction in Receivables = Original Receivables - New Receivables

= $2,000,000 - $1,699,002.65 = $300,997.35

Hence, Option "E" is correct.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Merry Parties Inc. carries an average inventory of $1,000,000. Its annual sales are $10 million, and...
Merry Parties Inc. carries an average inventory of $1,000,000. Its annual sales are $10 million, and its receivables conversion 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 $895,000 with no effect on sales. By how much must...
Costco carries an average inventory of $3,000,000. Its annual sales are $20 million and its gross...
Costco carries an average inventory of $3,000,000. Its annual sales are $20 million and its gross profit margin is 45%. The receivables conversion period is half of its inventory conversion period. Costco’s trade terms with its suppliers is net 30 and it always pays on time. Costco’s new CFO wants to improve the cash conversion cycle by 25 days, based on a 365-day year. His first strategy is to reduce the amount of inventory to $2,500,000 while maintaining the same...
Siren Inc. has annual sales of $75,000,000, its average inventory is $20,000,000, and its average accounts...
Siren Inc. has annual sales of $75,000,000, its average inventory is $20,000,000, and its average accounts receivable is $16,000,000. The firm buys all raw materials on terms of net 35 days, and it pays on time. The firm is searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels while lowering inventory by $4,000,000 and accounts receivable by $2,000,000, by how many days would the cash conversion cycle be changed? Use a 365-day...
Siren Inc. has annual sales of $75,000,000, its average inventory is $20,000,000, and its average accounts...
Siren Inc. has annual sales of $75,000,000, its average inventory is $20,000,000, and its average accounts receivable is $16,000,000. The firm buys all raw materials on terms of net 35 days, and it pays on time. The firm is searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels while lowering inventory by $4,000,000 and accounts receivable by $2,000,000, by how many days would the cash conversion cycle be changed? Use a 365-day...
1)Calculate GMROI and inventory turnover given annual sales of $20,000, average inventory (at cost) of $4,000...
1)Calculate GMROI and inventory turnover given annual sales of $20,000, average inventory (at cost) of $4,000 and a gross margin of 45%. (1point) 2)Using the following information, calculate additions to stock: (1 point) Sales $26,000 EOM stock $100,000 BOM stock $88,000 3)Using the following information, calculate the average BOM stock-to-sales ratio for a six-month merchandise budget plan: ( 2 points).                 GMROI                 130%                 Gross Margin     46% 4)Today is July 19. Buyers at two different stores are attempting to assess...
Bania Inc. has annual sales of $17 million, inventory levels of $2.5 million, receivables of $3.5...
Bania Inc. has annual sales of $17 million, inventory levels of $2.5 million, receivables of $3.5 million, and payables of $1.25 million.  The firms cost of goods sold is 80% of sales. What is Bania’s CCC? Please show all work step by step.
A firm with annual sales of $60 million pays out 50% of its sales as cost...
A firm with annual sales of $60 million pays out 50% of its sales as cost of goods sold. Overhead amounts to $10 million. Labour and salaries are $14 million. Thus, a profit of $6 million is realised. Assets are $20 million, of which 20% are in inventories. a) If the firm can (1) increase sales volume, (2) raise price, (3) reduce labour and salaries, (4) decrease overhead, or (5) reduce the costs of goods sold, how much change (in...
Alta Custom Inc. has $5 million of inventory and $2 million of accounts receivable. Its average...
Alta Custom Inc. has $5 million of inventory and $2 million of accounts receivable. Its average daily sales are $120,000. The company’s payables deferral period (accounts payable divided by daily purchases) is 31 days. What is their cash conversion cycle?
Alta Custom Inc. has $5 million of inventory and $2 million of accounts receivable. Its average...
Alta Custom Inc. has $5 million of inventory and $2 million of accounts receivable. Its average daily sales are $120,000. The company’s payables deferral period (accounts payable divided by daily purchases) is 31 days. What is their cash conversion cycle?
A firm’s annual credit sales are $1.34 million, with 51% of its daily average paid out...
A firm’s annual credit sales are $1.34 million, with 51% of its daily average paid out in purchases. It usually takes the company 30 days to meet its purchasing obligations. This payment pattern has not changed in recent years. However, the firm’s commitment to accounts receivable has shifted based on its current annual net income of $28k which meets the 2.3% required return, anticipated by senior management a year earlier. Normally, the firm collects its accounts in 24 days, an...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT