Chastain Corporation is trying to determine the effect of its inventory turnover
ID: 2801861 • Letter: C
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 $146000; its cost of goods sold is 80% of sales; and it earned a net profit of 2%, or $2920. It turned over its inventory 4 times during the year, and its DSO was 33 days. The firm had fixed assets totaling $31000. Chastain's payables deferral period is 50 days. Assume 365 days in year for your calculations. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet Calculate Chastain's cash conversion cycle. Round your answer to two decimal places. Do not round intermediate calculations. 97.85 days 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 % Suppose Chastain's managers believe that the inventory turnover can be raised to 9 times. What would Chastain's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for 2016? Round your answers to two decimal places. Do not round intermediate calculations. Cash conversion cycle days Total assets turnover ROA %
Explanation / Answer
a Sales 1,46,000 Cost of Goods Sold 80% 1,16,800 Other Cost 18% 26,280 Net Profit 2% 2,920 Inventory 365/4 91.25 Days DSO 33.00 Days Payables -50.00 DAys Cash Conversion Cycle 74.25 Days b Assets Turnover ratio Inventory 146000/4 36,500 Debtors 146000/365*33 13,200 Fixed Assets 31,000 Total Assets 80,700 Turnover 1,46,000 Assets Turnover ratio 146000/80700 1.81 ROA 2%*1.81 3.62% c Inventory 365/9 40.56 Days DSO 33.00 Days Payables -50.00 DAys Cash Conversion Cycle 23.56 Days Assets Turnover ratio Inventory 146000/9 16,222 Debtors 146000/365*33 13,200 Fixed Assets 31,000 Total Assets 60,422 Turnover 1,46,000 Assets Turnover ratio 146000/60422 2.42 ROA 2%*2.42 4.84%