Question

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $3,130,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 5.0 times during the year, and its DSO was 39 days. Its annual cost of goods sold was $1,750,000. The firm had fixed assets totaling $505,000. Strickler's payables deferral period is 41 days. Assume a 365-day year. Do not round intermediate calculations.

1. Calculate Strickler's cash conversion cycle. Do not round intermediate calculations. Round your answer to two decimal places.

     days

2. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Do not round intermediate calculations. Round your answers to two decimal places.

   Total assets turnover:  ×

   ROA:   %

3. Suppose Strickler's managers believe the annual inventory turnover can be raised to 8 times without affecting sale or profit margins. What would Strickler's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8 for the year? Do not round intermediate calculations. Round your answers to two decimal places.

   Cash conversion cycle:   days

   Total assets turnover:    ×

   ROA:    %

Answer 1

a). ICP = 365 / Inventory Turnover Ratio = 365 / 5 = 73 days

ACP = DSO = 39 days

CCC = ICP + ACP - PDP = 73 + 39 - 41 = 71 days

b). Inventory = Sales or COGS / Inventory Turnover Ratio = $3,130,000 / 5 = $626,000

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

= ($3,130,000 / 365) * 39 = $334,438.36

Total assets = Inventory + Accounts receivable + Fixed assets

= $626,000 + $334,438.36 + $505,000 = $1,465,438.36

Total Asset Turnover = Sales / Total Assets = $3,130,000 / $1,465,438.36 = 2.14 times

ROA = Profit Margin * Total Asset Turnover = 7% * 2.14 = 0.1495, or 14.95%

c). New ICP = 365 / Inventory Turnover = 365 / 8 = 45.63 days

New CCC = New ICP + ACP - PDP = 45.63 + 39 - 41 = 43.63 days

New Inventory = Sales or COGS / New Inventory Turnover Ratio = $3,130,000 / 8 = $391,250

New Total assets = New Inventory + Accounts receivable + Fixed assets

= $391,250 + $334,438.36 + $505,000 = $2,126,938.36

New Total Asset Turnover = Sales / Total Assets = $3,130,000 / $2,126,938.36 = 1.47 times

New ROA = Profit Margin * Total Asset Turnover = 7% * 1.47 = 0.1030, or 10.30%