Question

Below is financial information for two restaurant retailers. Popper’s Company operates an innovative retail bakery-cafe business and franchising business. At the end of 2010, Popper’s had 132 company-owned and 346 franchise-operated bakery-cafes. Popper’s located most of their unique bakery-cafe concept stores in suburban, strip mall, and regional mall locations. As a first mover in this concept, the company operates in 32 states. Simmer Corporation began operations five years earlier than Popper’s and purchases and roasts whole bean coffees and sells them, along with numerous coffee drinks and related products at over 2,900 Company-operated retail stores.

Selected Data for Popper’s Company and Simmer Corporation

(amounts in millions)

?	Simmer	Popper’s
Net Sales Sales Simmer $5,000 Popper’s 300	$4,076	$278
Cost of Goods Sold	1,686	97
Interest Expense	0	0
Net Income	268	22
Average Inventory	303	4
Average Fixed Assets	2,163	130

Required:

a.	Compute the Inventory turnover, fixed asset turnover, and accounts receivable turnover.
b.	Describe the likely reasons for the difference in the accounts receivable turnover and the inventory turnover

Answer 1

Solution a:

Inventory turnover ratio: = Cost of goods sold / Average inventory

Simmer = $1,686/ $303 = 5.56 times

Popper = $97 / 4 = 24.25 times

Fixed assets turnover ratio: Sales / Average fixed assets

Simmer = $4,076/ $2,163 = 1.88 times

Popper = $278 / 130 = 2.14 times

Note: Accounts receivables turnover ratio could not be calculated as average accounts receivables information is missing in question.

Solution b:

Popper company is having high inventory turnover ratio as compared to Simmer company. The most likely reason for differnece in inventory turnover ratio is that Popper company is keeping inventory for a lesser period in stock, they are moving for just in time inventory system while simmeer company holds inventory for a greater period to ensure seamless supply.