Question

Wie Corp's sales last year were $315,000, 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?

Answer 1

Answer:

Assets must decrease by 223,750

Explanation:

the total assets turnover is calcualte as follows:

$\frac{sales}{assets}$

As the new CFO jsut want to reduce assets and not to put the effort to increase sales as it see it less likely It will reduce assets (lower the credit term, lower inventory stocks among other measurements)

our goal is a value of 2.4 with sales of 315,000

$\frac{315,000}{Assets} = 2.4\\Assets = 315,000 \div 2.4$

Assets = 131.250‬

currently the assets are 355,000

we need to redue it to 131,250 so we need a decrease in the order of:

355,000 - 131,250 = 223,750