Question

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $2,105,000 (all on credit), and its net profit margin was 4%. Its inventory turnover was 5 times during the year, and its DSO was 37 days. Its annual cost of goods sold was $1,250,000. The firm had fixed assets totaling $365,000. Strickler's payables deferral period is 39 days. Assume a 365-day year. Do not round intermediate calculations.

A. Calculate Strickler's cash conversion cycle. Round your answer to two decimal places.

B. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answers to two decimal places.

Total assets turnover:  

ROA:   %

C. Suppose Strickler's managers believe the annual inventory turnover can be raised to 9 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 9 for the year? Round your answers to two decimal places.

  Cash conversion cycle:   days

  Total assets turnover:   

ROA:    %

Answer 1

A]

cash conversion cycle = days inventory outstanding + days receivable outstanding - days payable oustanding

days inventory outstanding = 365 / inventory turnover = 365 / 5 = 73 days

days receivable outstanding = 37 days

days payable outstanding = 39 days

cash conversion cycle = 73 + 37 -39 = 71 days

B]

days receivable outstanding = (average receivables / net credit dales) * 365

37 = (average receivables / 2,105,000) * 365

average receivables = 213,383.56

days inventory outstanding = (average inventory / COGS) * 365

73 = (average receivables / 1,250,000) * 365

average inventory = 250,000

total assets = fixed assets + receivables + inventory

total assets = 365,000 + 213,383.56 + 250,000 =  828,383.56

total asset turnover = sales / total assets = 2,105,000 / 828,383.56 = 2.54

ROA = net income / total assets

net profit margin = net income / sales

net income = 2,105,000 * 4% = 84,200

ROA = 84,200 / 828,383.56 =  0.1016, or 10.16%

C]

cash conversion cycle = days inventory outstanding + days receivable outstanding - days payable oustanding

days inventory outstanding = 365 / inventory turnover = 365 / 9 = 40.56 days

days receivable outstanding = 37 days

days payable outstanding = 39 days

cash conversion cycle = 40.56 + 37 -39 = 38.56 days

days receivable outstanding = (average receivables / net credit dales) * 365

37 = (average receivables / 2,105,000) * 365

average receivables = 213,383.56

days inventory outstanding = (average inventory / COGS) * 365

40.56 = (average receivables / 1,250,000) * 365

average inventory = 138,888.89

total assets = fixed assets + receivables + inventory

total assets = 365,000 + 138,888.89 + 250,000 =  753,888.89

total asset turnover = sales / total assets = 2,105,000 / 753,888.89 = 2.79

ROA = net income / total assets

net profit margin = net income / sales

net income = 2,105,000 * 4% = 84,200

ROA = 84,200 / 753,888.89 =  0.1117, or 11.17%