Question

Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year were $2,147,500 (all on credit), and its net profit margin was 8%. Its inventory turnover was 4.5 times during the year, and its DSO was 41 days. Its annual cost of goods sold was $1,125,000. The firm had fixed assets totaling $342,500. Strickler's payables deferral period is 43 days. Assume a 365-day year. Do not round intermediate calculations.

1. Calculate Strickler's cash conversion cycle. Do not round intermediate calculations. Round your answer to two decimal places.

     days

2. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Do not round intermediate calculations. Round your answers to two decimal places.

   Total assets turnover:  ×

   ROA:   %

3. 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? Do not round intermediate calculations. Round your answers to two decimal places.

   Cash conversion cycle:   days

   Total assets turnover:    ×

   ROA:    %

Answer 1

Inventory turnover		4.5
Inventory days	I	81.11	365/4.5
AR		2147500
DSO		41
AP (COGS)		1125000
Payables period	DPO	43
Fixed assets		342500
Cash conversion cycle	I + DSO - DPO
Cash conversion cycle	81.11+41 - 43		79.11
Asset turnover		Sales/Assets
Asset turnover		6.27
ROA		50.16%	(8%*2147500/342500)
New inventory days		9.01
CCC		7.01
Inventory (new)		27777.78	(COGS/(365/New inventory days))
New Assets		120277.8	(342500 - (112500/4.5 - 27777.78))
ROA		142.84%
Asset turnover		17.85