Christie Corporation is trying to determine the effect of its inventory turnover

Question

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 $283,000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or $8,490. It turned over its inventory 5 times during the year, and its DSO was 34.5 days. The firm had fixed assets totaling $37,000. 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. 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. Total assets $ ROA % Suppose Christie's managers believe that the inventory turnover can be raised to 8.6 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.6 for 2012? Cash conversion cycle days Total assets $ ROA %

Explanation / Answer

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Inventory conversion period = 365/Inventoryturnover ratio

= 365/5

= 73 days.

Receivables collection period = DSO = 34.5 days.

conversion cycle = conversion period + collection period - deferral period

= 73 + 34.5 - 50

= 57.5 days.

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Inventory conversion period = 365/8.6

= 42.44 days.

Cash conversion cycle = 42.44 + 34.5 - 50 = 26.94 days.

Inventory = Sles / Inv.turn over

= $283,000/7.3 = $32906

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