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ABC Inc. has annual sales of $12 million, its cost of goods sold is 75%...

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Finance

ABC Inc. has annual sales of $12 million, its cost of goods sold is 75% of annual sales, it carries an average inventory of $800,000 and its average collection period is as long as its inventory conversion period. The firm buys on terms of net 45 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 5 days, based on a 365-day year. He believes that he can reduce the average collection period to 30 days with no effect on sales. Considering that payable period remains same, to achieve the goal, the firm must also reduce its levels of inventory and inventory conversion period. By how much the firm must reduce its inventory to meet its goal of reducing the cash conversion cycle?

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