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 $294,000; its cost of goods sold is 80% of sales; and it earned a net profit of 3%, or $8,820. It turned over its inventory 7 times during the year, and its DSO was 36.5 days. The firm had fixed assets totaling $30,000. 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 8.8 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 8.8 for 2016? Round your answers to two decimal places. Do not round intermediate calculations.
   

   Cash conversion cycle		days
   Total assets turnover
   ROA		%

Answer 1

Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory

7 = 80% of 294,000/Average Inventory

Hence, Average Inventory = $33,600

Days Inventory Outstanding = 365/Inventory turnover ratio

= 365/7 = 52.14

Also average collection period = Sales/Average Debtors

Hence Average Debtors = $294,000 / 10 = $29,400

a). Cash Conversion Cycle = ICP + DSO - PDP = 52.14 + 36.5 - 45 = 43.64 days

b). Total Assets = Fixed Assets + Total Inventory + Receivables

= $30,000 + $33,600 + $29,400 = $93,000

Total Assets Turnover = Sales / Total Assets = $294,000 / $93,000 = 3.16 times

ROA = Net Income / Total Assets = $8,820 / $93,000 = 9.48%

c). New ICP = 365 / 8.8 = 41.48 days

New CCC = 41.48 + 36.5 - 45 = 32.98 days

New Inventory = [0.8 x $294,000] / 8.8 = $26,727.27

Total Assets = Fixed Assets + Total Inventory + Receivables

= $30,000 + $26,727.27 + $29,400 = $86,127.27

Total Assets Turnover = Sales / Total Assets = $294,000 / $86,127.27 = 3.41 times

ROA = Net Income / Total Assets = $8,820 / $86,127.27 = 10.24%