A manufacturer of air conditioner compressors is concerned that too much money is tied up in its value chain. Average raw material inventory is $50 million and work-in-process (WIP) production inventory is $20 million. Sales are $20 million per week and finished goods inventory averages $30 million. The average outstanding accounts receivable is $60 million. Assume 50 weeks in one year. The value chain is shown below:
Raw Materials Inventory--->Production (WIP) Inventory---> Finished Goods---->Accounts Recievables
a. What is the target level of average accounts receivable inventory if management can reduce the time a dollar spends in accounts receivable inventory (processing and collections) by one-half by improving the accounts receivable process?
b. What else does this flow time analysis problem demonstrate?