Pascarella Inc. is revising its payables policy. It has annual sales of $50,735,
ID: 2774928 • Letter: P
Question
Pascarella Inc. is revising its payables policy. It has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year?
-26.6 days
-29.5 days
-32.8 days
-36.4 days
-40.5 days
Explanation / Answer
Ans is -40.5 days
Original New Annual sales 5,07,35,000 5,07,35,000 Days in year 365 365 Sales per day 1,39,000 1,39,000 COGS/Sales 85% 85% COGS per day 1,18,150 1,18,150 Inventory 1,50,12,000 1,30,62,000 Inv. conversion period 127.06 110.55 Accounts receivable 1,00,08,000 80,62,000 Avg. collection period 72 58 pay. deferral period 30 40