Question

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $3,440,000 (all on credit), and its net profit margin was 4%. Its inventory turnover was 6.0 times during the year, and its DSO was 42 days. Its annual cost of goods sold was $1,800,000. The firm had fixed assets totaling $540,000. Strickler's payables deferral period is 46 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

Solution :-

(A)

Days inventory Outstanding = 365 / Inventory turnover Ratio

= 365 / 6 = 60.833 Days

Cash Conversion Cycle = Days inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

= 60.8333 + 42 - 46

= 56.833 Days

(B)

Calculation of inventory

Inventory Turnover ratio = Cost of Goods Sold / Inventory

6 = $1,800,000 / Inventory

Inventory = $300,000

Calculation of Account receivables =

Days Sales Outstanding = [ Account Receivables / Total Credit Sales ] * 365

42 = [ Account Receivables / $3,440,000 ] * 365

Accounts Receivables = $395,835.6

Calculation of Total Assets = Fixed Asset + Account receivable + Inventory

= $540,000 + $395,835.6 + $300,000

= $1,235,836.62

Net Profit Margin = Net income / Total Sales

0.04 = Net Income / 3,440,000

Net income = $137,600

Total Assets turnover = Sales / Total Assets = $3,440,000 / $1,235,836.62 = 2.78 times

Now Return on Assets = Net income / Total Assets = $137,600 / $1,235,836.62  = 0.11134 = 11.134%

(C)

When the annual inventory turnover can be raised to 8 times without affecting sale or profit margins

Days inventory Outstanding = 365 / Inventory Turnover Ratio = 365 / 8 = 45.625 Days

Cash Conversion Cycle = Days inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

= 45.625 + 42 - 46

= 41.625 Days

Calculation of inventory

Inventory Turnover ratio = Cost of Goods Sold / Inventory

8 = $1,800,000 / Inventory

Inventory = $225,000

Calculation of Account receivables =

Days Sales Outstanding = [ Account Receivables / Total Credit Sales ] * 365

42 = [ Account Receivables / $3,440,000 ] * 365

Accounts Receivables = $395,835.6

Calculation of Total Assets = Fixed Asset + Account receivable + Inventory

= $540,000 + $395,835.6 + $225,000

= $1,160,836.62

Net Profit Margin = Net income / Total Sales

0.04 = Net Income / 3,440,000

Net income = $137,600

Total Assets turnover = Sales / Total Assets = $3,440,000 / $1,160,836.62 = 2.9634 times

Now Return on Assets = Net income / Total Assets = $137,600 / $1,160,836.62  

= 0.1185 = 11.85%

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