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 2011 sales (all on credit) were $300,000; its cost of goods sold is 80% of sales; and it earned a net profit of 4%, or $12,000. It turned over its inventory 6 times during the year, and its DSO was 32 days. The firm had fixed assets totaling $28,000. 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.

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 2011?

Total assets $   ROA %

Explanation / Answer

Calculation of cash conversion cycle :

Therefore, the cash conversion cycle is 42.83 days.

Calculation of total assets turnover and ROA:

Calculation of total assets:

Total assets turnover is Sales / Total assets = $ 300,000 / 94,301 = 3.18 times

ROA is Net income/ Total assets = 12,000 / 94,301 x 100 = 12.73%

If the inventory turnover is raised to 9.4 times , no. of days of inventory is revised to 365/9.4 or 38.83 days.

Cash conversion cycle reduces to (38.83 + 32 - 50) days or 20.83 days.

Total assets are now reduced to $ 79,834. ( Inventory 240,000/9.4 = $ 25,532 + Account receivables $ 26,302 + Fixed assets $ 28,000)

Now the total asset turnover increases to 300,000/79,834 = 3.76 times

ROA improves to $ 12,000/ 79,834 x 100 = 15.03%

Asset Days Inventory ( 365/6) 60.83 Account receivables 32 Operating cycle 92.83 Less payables deferral period (50) Cash conversion cycle 42.83

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.