DOLLAR BILL’S, a retail store in New York City, buys its inventory on credit. Upon purchase, it is given 30 days in which to pay its suppliers. It sells all of its merchandise on credit. It extends 60 days of credit to its customers. Its inventory turnover rate is 60 days.
Situation 1Using the Cash Conversion Model, measure DOLLAR BILL’S financing cycle in both days and money ($US) using the following assumptions:
Sales of $730,000
Gross Margin of 30%
Financing Rate 61/2%
Situation 2Recent management decisions have had the following impact:
DOLLAR BILL has renegotiated its credit line so that it has 35 days to pay its suppliers
It now extends 45 days of credit to its customers,
It has an inventory turnover rate of 45 days.
All other factors remain the same. Has DOLLAR BILLâ€™S financing cycle improved or declined? Quantify the change in days and in dollars. Please show your work.
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