Question

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $2,555,000 (all on credit), and its net profit margin was 8%. Its inventory turnover was 4.5 times during the year, and its DSO was 44 days. Its annual cost of goods sold was $1,350,000. The firm had fixed assets totaling $420,000. Strickler's payables deferral period is 50 days. Assume 365 days in year for your calculations. Do not round intermediate calculations. Calculate Strickler's cash conversion cycle. Round your answer to two decimal places. days Assuming Strickler holds negligible amounts of cash and marketable securities,

Calculate its total assets turnover. Round your answer to two decimal places.

Calculate its ROA. Round your answer to two decimal places.

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 have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places.

What would Strickler's total assets turnover have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places.

What would Strickler's ROA have been if the inventory turnover had been 8 for the year? Round your answer to two decimal places.

Answer 1

Cash Conversion Cycle = Days Sales outstanding + Days Inventory outstanding- payables deferral period

Days inventory outstanding = 365/Inventory turnover = 365/4.5 = 81.11

Cash Conversion Cycle = 44 + 81.11 - 50 = 75.11 days

Total Assets = Fixed Assets + Inventory + Accounts receivables

Inventory = COGS/Inventory Turnover =   $1,350,000/4.5 = $300,000

Accounts Receivables = (Sales*DSO)/365 = $2,555,000*44/365 = $308,000

Total Assets = $420,000 + $300,000 + $308,000 = $1,028,000

Total Assets Turnover = Sales/Total Assets = $2,555,000/$1,028,000 = 2.49

ROA = Net Income/Total Assets = ($2,555,000*0.08)/$1,028,000 = 19.88%

If inventory turnover is raised to 8 times

Cash Conversion Cycle = Days Sales outstanding + Days Inventory outstanding- payables deferral period

Days inventory outstanding = 365/Inventory turnover = 365/8 = 45.625

Cash Conversion Cycle = 44 + 45.625 - 50 = 39.625 days = 39.63 days

Total Assets = Fixed Assets + Inventory + Accounts receivables

Inventory = COGS/Inventory Turnover =   $1,350,000/8 = $168,750

Accounts Receivables = (Sales*DSO)/365 = $2,555,000*44/365 = $308,000

Total Assets = $420,000 + $168,750 + $308,000 = $896,750

Total Assets Turnover = Sales/Total Assets = $2,555,000/$896,750 = 2.85

ROA = Net Income/Total Assets = ($2,555,000*0.08)/$896,750 = 22.79%