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Answer to Question #6803 in Economics of Enterprise for john

Question #6803
Zervos Inc. had the following data for 2008 (in millions). The new CFO believes (a) that an improved inventory management system could lower the average inventory by $4,000, (b) that improvements in the credit department could reduce receivables by $2,000, and (c) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, 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 the cash conversion cycle be lowered?

Original Revised
Annual sales: unchanged
Cost of goods sold: unchanged
Average inventory: lowered by $4,000
Average receivables: lowered by $2,000
Average payables: increased by $2,000
Days in year $110,000
$80,000
$20,000
$16,000
$10,000
365 $110,000
$80,000
$16,000
$14,000
$12,000
365
Expert's answer
CCC = DIO + DSO - DPO




COGS per day = 80000/365 = 219.17

Revenue per day = 110000/365 = 301.36

Average inventory = (20000+16000)/2 = 18000

Average receivables = (16000+14000)/2 = 15000

Average AP = (10000+12000)/2 = 11000




DIO = Average inventory / COGS per day = 82.12

DSO = Average receivables / Revenue per day = 49.77

DPO = Average AP / COGS per day = 50.18




CCC = 82.12 + 49.77 - 50.18 = 81.71

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