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 $287,000; its cost of goods sold is 80% of sales; and its earned a net profit of 8%, or $22,960. It turned over its inventory 5 times during the year, and its DOS was 39 days. The firm had fixed assets totaling $40,000. Chirstie's payables deferral period is 50 days. Assume 365 days in year for your calculations. a. Calculate Christie's cash conversion cycle. Round your answer to two decimal places. b. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total asset turnover and ROA. Round your answer to two decimal places. c. Suppose Christie's managers believe that the inventory turnover can be raised to 8.4 times. What would Christie's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.4 for 2012?

Explanation / Answer

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

Cash Conversion Cycle = 39 + 365/5 - 50 = 62 days

2. Total Assets Turnover = Sales / Total Net Operating Assets

= 287000 / 40000 = 7.18

3. ROA = Net Income / Assets = 22960 / 40000 = 57.40%

4. If Inventory turnover is increased from 5 times to 8.5 times, now

Cash Conversion Cycle = 39 + 365/8.4 - 50 = 32.5 days

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