Water Inc.'s net 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 of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the total assets turnover ratio down to the industry average without affecting sales. By how much will the need assets be reduced to bring the total assets turnover ratio to the industry average, holding sales constant?
A) $201,934
B) $212,563
C) $223,750
D) $234,938

Question

Quizplus · Accepted Answer

To bring the total assets turnover ratio to the industry average of 2.4, we first calculate the desired level of total assets needed to achieve this ratio with the current sales level. The formula for the total assets turnover ratio is Net Sales / Total Assets. Rearranging this formula to solve for Total Assets gives us Total Assets = Net Sales / Total Assets Turnover Ratio. Plugging in the given values, we get Total Assets = $315,000 / 2.4 = $131,250. To find by how much the current assets need to be reduced, we subtract this desired level of total assets from the current total assets: $355,000 - $131,250 = $223,750.

Water Inc'S Net Sales Last Year Were $315,000, and Its Year-End