(b) A firm is considering several policy changes to increase sales. It plans to increase the variety of inventory by Sh 10 Million. It will offer more liberal sales terms, but this will result in receivables increasing by sh. 65 Million. These activities are forecasted to increase sales by sh. 800 Million a year. Cost of goods sold will remain at 80% of sales because of the firms increase purchases of its own production needs, payables will increase by sh. 35 Million.

Required:-

(a) What effect will these changes have on the firms Cash Conversion Cycle? (8 Marks)

(b) What effect will the following have on the Cash Conversion Cycle?

(i) Customers are given a larger discount for Cash transactions.

(ii) The inventory turnover ratio falls from 8 to 6.

(iii) The firm adopts a policy of reducing outstanding accounts payable.

(iv) The firm starts producing more goods in response to customers advance orders instead of producing for inventory?

(v) A temporary glut in the commodity market induces the firm to stock up on raw materials while prices are low. (12 Marks)