CASH CONVERSION CYCLE Chastain Corporation is trying to determine the effect of

Question

CASH CONVERSION CYCLE 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 $275,000; its cost of goods sold is 80% of sales, and it earned a net profit of 3% or $8,250. It turned over its inventory 4 times during the year, and its DSO was 35 days. The firm had fixed assets totaling $30,000 Chastain's payables deferral period is 35 days. Assume 365 days in year for your a. Calculate Chastain's cash con 3 days places round intermediate calcule ations, b. Assuming Chastain holds negligible anounts of cash and marketable securities, calculate its total assets turnover and ROA. Round your answers to two decimal places. Do not round intermedi te calculations. Total assets turnover ROA % c. Suppose Chastain's managers believe that the inventory turnover can be raised to 9.4 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.4 for 2016? Round your nover, and Cash days cycle Total assets 3 ROA

Explanation / Answer

Cash converstion cycle (CCC) = DSO+DIO-DPO

Days Inventory Outstanding (DIO) = (Average inventory/Cost of goods sold)* 365

Cost of goods sold = 80% 0f sales = 220,000

Average inventory = cost of goods sold/ Inventory turnover ratio

= 220000/4 = 55,000

DIO = (55,000/220,000)*365

= 91 days

CCC = 35 + 91 - 35

(a) CCC = 91 days

(b)

(i)Total Assets Turnover = Sales/ Total Assets = 275,000/30,000 = 9 times

(ii) Return on Assets (ROA) = Net Income / Total Assets = 8,250/30,000 = 27.5%

(c) Assuming a inventory turnover ratio of 9.4 times

Days Inventory Outstanding (DIO) = (Average inventory/Cost of goods sold)* 365

Cost of goods sold = 80% 0f sales = 220,000

Average inventory = cost of goods sold/ Inventory turnover ratio

= 220000/9.4 = 23,404

DIO = (23,404/220,000)*365

= 39 days

CCC = 35 + 39 - 35

(i) CCC = 39 days

(ii)Total Asset Turnover = = 275,000/30,000 = 9 times

(iii)Return on Assets (ROA) = Net Income / Total Assets

= 8,250/30,000 = 27.5%

Return on Assets and Asset turnover remains the same since there is no change in the Assets or revenue.

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