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Answer 67532

The document provides information about Margetis Inc., which wants to decrease its cash conversion cycle by 10 days. It carries an average inventory of $750,000 with annual sales of $10 million and cost of goods sold at 75% of sales. The firm buys on net 30 day terms and pays on time. The CFO believes reducing average inventory to $647,260 without affecting sales would decrease the inventory conversion period. To meet the overall goal of reducing the cash conversion cycle by 10 days, accounts receivable must also be reduced by $136,986.

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76 views2 pages

Answer 67532

The document provides information about Margetis Inc., which wants to decrease its cash conversion cycle by 10 days. It carries an average inventory of $750,000 with annual sales of $10 million and cost of goods sold at 75% of sales. The firm buys on net 30 day terms and pays on time. The CFO believes reducing average inventory to $647,260 without affecting sales would decrease the inventory conversion period. To meet the overall goal of reducing the cash conversion cycle by 10 days, accounts receivable must also be reduced by $136,986.

Uploaded by

Lizzy Mondia
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Answer on Question #67532 - Economics - Accounting

Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost
of goods sold is 75% of annual sales, and its average 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 10 days, based on a 365-day year. He believes he can reduce
the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce
its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Answer:
Summarize raw data in the table:
Indexes Original New
Inventory $750,000 $647,260
Annual sales $10,000,000 $10,000,000
Days/year 365 365
COGS/sales 75% 75%
Payables deferral period (PDP) 30 days 30 days
Rec collection period (DSO) = 2 ICP
Cost of gooods sold $7,500,000 $7,500,000
Inv Conv Period (ICP) 36.5 days 31.5 days
DSO (calculated) 73 days 68 days
(36.5*2) (69.5+30-31.5)
Receivables (A/R) $2,000,000 $1,863,014
(73 * (10,000,000 / 365) (68 * (10,000,000 / 365)
CCC = DSO + ICP – PDP = 79.5 days 69.5 days CHECK on CCC
(73 + 36.5 – 30)
Decrease in CCC 10 days
New CCC 69.5 days
(79.5 – 10)

Reduction in A/R = Orig. A/R − New A/R = $2,000,000 - $1,863,014 = $136,986


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