Question

Chastains Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastains 2016 sale (all on credit) were $121000; its cost of goods sold is 80% of sale; and it earned a net profit of 2%, or 2420. It turned over its inventory 6 times during the year, and its DSO was 36 days. The firm had fixed assets totaling $30000. Chastains payable deferral period is 35 days. Assume 365 days in years for your calculations.

A. Calculate Chanstains cash conversion cycle. Round your answer to two decimal places

C. Suppose Chanstain's managers believe that the inventory turnover can be raised to 8.4 times. What would Chanstains cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.4 for 2016? Round your answer to two decimals places.

Cash conversion cycle

Answer 1

a). ICP = 365 / Inventory turnover ratio = 365 / 6 = 60.83 days

ACP = DSO = 36 days

CCC = ICP + ACP + PDP = 60.83 + 36 - 35 = 61.83 days

c). New ICP = 365 / 8.4 = 43.45 days

New CCC = 43.45 + 36 - 35 = 44.45 days

Accounts receivable = (Sales / 365) × Average collection period

= ($121,000 / 365) × 36 = $11,934.25

Inventory = COGS / ICP = [0.80 x $121,000] / 43.45 = $2,227.73

Total assets = Inventory + Accounts receivable + Fixed assets

= $2,227.73 + $11,934.25 + $30,000 = $44,161.97

ROA = Net Profit / Total Profit = $2,420 / $44,161.97 = 0.0548, or 5.48%