ligit lead to production slo u increas and higher costs, and lower finished good
ID: 2811344 • Letter: L
Question
ligit lead to production slo u increas and higher costs, and lower finished goods inventories might lesion n and loss of sales. So, before inventories are changed, it study operating as well as financial effects. The situation i will be necessary t to cash and receivables. Johnson has begun her investigation by collect ith reger shown here. (The partial cash budget shown after the ratioe mini case.) h and receivables. Johnson has begun her investigation by collectin Industry Current Quick Total liabilities/assets Turnover of cash and securities Days sales outstanding (365-day basis) Inventory turnover Fixed assets turnover Total assets turnover Profit margin on sales Return on equity (ROE) Payables deferral period 1.75 0.92 58.76% 16.67 45.63 10.80 7.75 2.60 2.07% 10.45% 30.00 2.25 L16 50.00% 22.22 32.00 20.00 13.22 3.00 3.50% 21.00% 33.00Explanation / Answer
a. It seems that RR has a moderate current asset usage policy compared to industry standards.
b. RR's Current asset ratios are only a little below industry standards. This means that they seem to be following an appropriate moderate policy. A moderate policy places itself between a restricted in which there are lower levels and relaxed in which there are higher levels of current assets. RR's current asset levels neither appear too high or too low. There is cash surplus in the end which means that RR is earning fairly good amount of revenue though not quite matching industry standards.
c. CCC = DSO + DIO - DPO
ITO = 10.8
Or, 10.8 = Sales/Avg. inventory = 660,000 / Avg. inventory
Or, AI = $61,111
DIO = I/COGS x 365 =( 61,111 / 0.9 x 660,000) x 365 = 37.55 days
DPO = 30 days
CCC = 45.63 + 37.55 + 30 = 113.18 days
d. The industry's ITO is twice as large as the RR's. This means that RR is holding up too much inventory. A higher ITO means higher number of inventory sold. RR is spending too much on inventory it can't sold. So either the speding on stock needs to be reduced or the inventory needs to be cleared. There is no point storing inventory if you can't sell it. It becomes worthless and increases storage costs.
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