The Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash conversion cycle. Christie’s 2002 sales (all on credit) were $150,000 and it earned a net profit of 6%, or $9,000. It turned over its inventory 5 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. Assume 365 days per year.
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 had been 7.3 for 2002?