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Net Change in the Cash Conversion Cycle

Gaston Piston Corp. has annual sales of $50,000,000 and maintains an average inventory level of $15,000,000. The average accounts receivable balance outstanding is $10,000,000. The company makes all purchases on credit and has always paid on the 30th day.

The company is now going to take full advantage of trade credit and pay its suppliers on the 40th day. If sales can be maintained at existing levels but inventory can be lowered by $2,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle? (Assume there are 360 days in the year.)

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Cash Conversion Cycle = AR Days + Inventory Days - Payable Days
We calculate the old and new AR days, Inventory days and Payable Days
AR = AR/(Sales/360)
Inventory Days = Inventory/(Sales/360)

For the given ...

Solution Summary

The solution explains how to determine the net change in the cash conversion cycle with formulas, calculations and answers.