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ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies

Dunmore Co has annual sales of $3,650,000, all on credit, and cost of sales of $2,920,000. It currently takes 60 days to collect from customers, holds inventory for 45 days and pays suppliers after 40 days (365-day year; inventory and payables based on cost of sales). Management plans to cut inventory days to 30 and extend payable days to 50, with receivable days unchanged. What is the reduction in net working capital investment?

Net working capital falls by $200,000. Daily cost of sales is $8,000, so cutting inventory by 15 days releases $120,000 and lengthening payables by 10 days adds $80,000 of supplier funding.

  1. A$120,000
  2. B$200,000
  3. C$240,000
  4. D$320,000Correct

Explanation

Daily cost of sales = 2,920,000/365 = 8,000. Inventory reduction of 15 days = 120,000. Payables increase of 10 days = 80,000 reduces net investment further. Total reduction = 120,000 + 80,000 = 200,000. So the correct option is $200,000, not $320,000 which wrongly adds 40 days.

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