Reference no: EM132564721

Costco carries an average inventory of $3,000,000. Its annual sales are $20 million and its gross profit margin is 45%. The receivables conversion period is half of its inventory conversion period. Costco's trade terms with its suppliers is net 30 and it always pays on time. Costco's new CFO wants to improve the cash conversion cycle by 25 days, based on a 365-day year. His first strategy is to reduce the amount of inventory to $2,500,000 while maintaining the same level of sales. His second strategy is to negotiate longer credit term with the suppliers, and he expects this move will increase his account payable balance by 10%. By how much must the firm also reduce its accounts receivable level to meet its goal of a 25-day reduction in the cash conversion cycle?

You must show all calculation steps, providing a final answer only will not get you full marks.