Cash conversion cycle Christie Corporation is trying to determine the effect of

Question

Cash conversion cycle

Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie's 2012 sales (all on credit) were $138,000; its cost of goods sold is 80% of sales; and it earned a net profit of 8%, or $11,040. It turned over its inventory 4 times during the year, and its DSO was 31 days. The firm had fixed assets totaling $31,000. Christie's payables deferral period is 35 days. Assume 365 days in year for your calculations.

A. Calculate Christie's cash conversion cycle. Round your answer to two decimal places.
_____ days

B. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places.

C. Suppose Christie's managers believe that the inventory turnover can be raised to 9.4 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.4 for 2012?

Explanation / Answer

Answer:

1.Cash conversion cycle = Days inventory outstanding+Days sales outstanding - Days payble outstanding

= 365/4 + 31 - 35 = 87.25 days.

2. Total Asset = Fixed asset+Inventory + Receivables

Inventory = Cost of goods sold/Inventory turnover ratio => ($138,000*80%)/4 = $27,600

Receivables = Credit sales/receivables turnover = Credit sales/(365/Days sales outstaning) = $138,000/(365/31)

= 11,720.55

So the total asset = $31,000 + 27,600 + 11.720.55 = $70,320.55

Asset turnover = $138,000/$70,320.55 = 1.96

ROA = Net profit/Total asset = $11,040/$70,320.55 = 0.157 = 15.7%

c) If inventory turnover = 9.4

Cash conversion cycle = Days inventory outstanding+Days sales outstanding - Days payble outstanding

= 365/9 + 31 - 35 = 36.56 days.

Now revised inventory = Cost of goods sold/Inventory turnover ratio => ($138,000*80%)/9 = $12,266.67

Total asset = $31,000 + $12,266.67 + 11.720.55 = $54,987.22

Total asset turnover = $138,000/$54,987.22 = 2.51 times

ROA = Net profit/ total asset = $11,040/$54,987.22 = 0.2008 = 20.08%

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