Question

Chastain Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Chastain's 2016 sales (all on credit) were $241,000; its cost of goods sold is 80% of sales; and it earned a net profit of 2%, or $4,820. It turned over its inventory 6 times during the year, and its DSO was 34.5 days. The firm had fixed assets totaling $27,000. Chastain's payables deferral period is 45 days. Assume 365 days in year for your calculations.

1. Calculate Chastain's cash conversion cycle. Round your answer to two decimal places. Do not round intermediate calculations.
     days
2. 
   
3. Assuming Chastain holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answers to two decimal places. Do not round intermediate calculations.
   

   Total assets turnover
   ROA		%

4. 
   
5. Suppose Chastain's managers believe that the inventory turnover can be raised to 9.3 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.3 for 2016? Round your answers to two decimal places. Do not round intermediate calculations.
   

   Cash conversion cycle		days
   Total assets turnover
   ROA		%

Answer 1

a. Cash conversion cycle=Days sales Outstanding (DSO) +Inventory days- payables deferral period

Inventory days=365/inventory turnover rate=365/6=60.83 days

Cash conversion cycle=Days sales Outstanding (DSO) +Inventory days-payables deferral period =34.5+60.83-45=50.33 days

b. Total asset turnover ratio=Sales/Total assets

==>DSO=(Receivables/Sales)*365

receivables=34.5*241,000/365=$22,779.5

==> Inventory days=(Inventory/Cost of goods sold)*365

Cost of goods sold=85%*sales=80%*241,000=192,800

Inventory=60.83*192800/365=32,133.3

Total assets=fixed assets+receivables+inventory

Total assets=27000+22779.5+32133.3=81912.8

Asset turnover ratio=241000/81912.8=2.94

c. ROA (return on assets)=Net income/Total assets=4820/81912.8=5.88% (0.0588)

d. If inventory turn rate goes up to 9.3, the Inventory days= 365/9.3=39.25 days

Cash conversion cycle=34.5+39.25-45=28.75 days

Inventory becomes=39.25*192800/365=20,731.2

Total assets=27000+22779.5+20,731.2=70510.68

e. Asset turnover ratio=Sales/Total assets=241000/70510.68=3.42

ROA=Net income/total assets=4820/70510.68=6.84% (0.0684)