Aztec Products wishes to evaluate its cash conversion cycle. One of the firm’s financial analysts has discovered that, on average, the firm holds items in inventory for 65 days, pays its suppliers 35 days after purchase, and collects its receivables after 55 days. The firm’s annual sales (all on credit) are about $2.1 billion, its cost of goods sold represents about 67% of sales, and purchases represent about 40% of the cost of goods sold. Assume a 365-day year.

a. What are Aztec Products’ operating cycle and cash conversion cycle?

b. How many dollars of resources does Aztec have invested in (1) inventory, (2) accounts receivable, (3) accounts payable, and (4) total CCC?

c. If Aztec could shorten its cash conversion cycle by reducing its inventory holding period by five days, what effect would that have on the total resource investment found in part (b)?

d. If Aztec could shorten its CCC by five days, would it be best to reduce the inventory holding period, reduce the receivables collection period, or extend the accounts payable period? Why?

Answer rating: 100% (QA)

Cash Conversion Cycle CCC Cash conversion cycle CCC refers to the over ... View the full answer