Question

Wie Corp's sales last year were $280,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant? Do not round your intermediate calculations.

Answer 1

Answer:

$238,333

Explanation:

Assets turnover is a ratio of sales to the fixed asset of a company. It shows that how effectively the company using its fixed assets to generate the revenue. It measures the efficiency of the fixed asset in making sales.

Formula

Asset Turnover = Net Sales / Avg. Fixed Assets

Asset turnover industry average = 2.4

As per given Condition

Asset Turnover of Industry = Asset Turnover of TATO

2.4 = Net Sales / Fixed Assets

As the sales is constant, so we will calculate the fixed asset value

2.4 = $280,000 / Fixed Assets

Fixed Assets = $280,000 / 2.4 = $116,667

Reduction in assets = $355,000 - $116,667 = $238,333

By $238,333  the assets will be reduced to bring the TATO to the industry average, holding sales constant.