Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding

Question:

Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s 2008 sales (all on credit) were $150,000; and it earned a net profit of 6%, or $9,000. It turned over its inventory 6 times during the year, and its DSO was 36.5 days. The firm had fixed assets totaling $35,000. Christie’s payables deferral period is 40 days.

a. Calculate Christie’s cash conversion cycle.

b. Assuming Christie holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA.

c. Suppose Christie’s managers believe that the inventory turnover can be raised to 7.3 times. What would Christie’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 7.3 for 2008?

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