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In: Accounting

Exercise 1) - Procurement impact on economic performance Consider the following data: Income statement: Purchases: 1,000...

Exercise 1) - Procurement impact on economic performance

Consider the following data:

Income statement:

Purchases: 1,000 €

EBIT: 280 €

No other costs

Balance Sheet:

Total Assets: 2,000 €

Inventory: 700 €

Question: How much ROA changes by reducing 5% cost of purchases?

Exercise 2) - Procurement impact on financial performance

Consider the following situation:

A supermarket buys shampoo from a supplier and keeps it on the shelf about one week before the customer buys it

Customers pay cash or via credit card, so the average payment time from customers is two weeks

The supermarket pays suppliers eight weeks after the purchase

Question: What is the value of the C2C (or Cash-to-Cash or Cash-Generation-Cycle)?

Solutions

Expert Solution

Exercise 1.
ROA = Net income/ Total Assets
          = 280/2000
          = 0.14
          = 14%
If cost of purchase reduce by 5%
Cost of purchases = 1000-(1000x5%)
                                     = 950
Increase in EBIT = 280+50
                                 = 330
Inventory = 700-35
                     = 665
Total Assets = 2000-700+665
                          = 1965
ROA = 330/1965
          = 0.1679
          = 16.79%
ROA will increase by 2.79% by reducing 5% cost of purchases.
Exercise 2.
C2C = Days inventory on hand + Days sales outstanding - Days payable outstanding
        = one week + two weeks - eight weeks
        = -five weeks
this means a company can easily pay off its outstanding 5 weeks after receiving it.
A negative C2C is a good thing.

ekkarill92 answered 1 year ago
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