Cash conversion cycle Christie Corporation is trying to determine the effect of
ID: 2651085 • Letter: C
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 $208,000; its cost of goods sold is 80% of sales; and it earned a net profit of 7%, or $14,560. It turned over its inventory 4 times during the year, and its DSO was 30 days. The firm had fixed assets totaling $32,000. Christie's payables deferral period is 50 days. Assume 365 days in year for your calculations.
Calculate Christie's cash conversion cycle. Round your answer to two decimal places.
{C} days
Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answer to two decimal places.
Suppose Christie's managers believe that the inventory turnover can be raised to 8.8 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.8 for 2012?
Explanation / Answer
cash conversion cycle = days inventory outstanding+days sales outstanding - days payable outstanding
days inventory outstanding = 365/inventory turnover = 365/4 = 91.25 days
days payable outstanding = 50 days
cash conversion cycle = 91.25+30 - 50 = 71.25 days
Total assets turnover = sales/total assets
= 208,000/32,000 = 6.50
ROA = net profit/assets
= 14,560/32,000 = 45.50%
If inventory turnover is 8.8 times, then days inventory outstanding = 365/8.8 = 41.47 days
cash conversion cycle = 41.47+30-50 = 21.27 days
As we know, inventory turnover is COGS/inventory
and COGS = 80% of sales = 0.8*208,000 = 166,400
So, when inventory turnover is 4: 4 = (166,400/inventory)
or, inventory = 41,600
when turnover is 8.8 and assuming that COGS have not changed:
8.8 = 166,400/inventory
or inventory = 18,909. so inventory has fallen. Total assets will also decrease. Amount of decrease = 41,600 - 18909 = 22,691
So assets now will be 32,000 - 22,691 = 9309
ROA = 14560/9309 = 156.40%
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