Wie Corp's sales last year were $235,000, 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.

Question

Wie Corp's sales last year were $235,000, 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.

BlackTom AI · Accepted Answer

We start by understanding the TATO (Total Asset Turnover) concept: TATO = Sales / Total Assets. To achieve the industry average TATO of 2.4 while keeping sales constant at $235,000, the target total assets must satisfy 2.4 = 235,000 / TargetAssets, so TargetAssets = 235,000 / 2.4.

Compute the target assets: 235,000 ÷ 2.4 = 97,916.666... dollars. Since assets are measured in whole dollars, you would typically keep the exact value for internal calculations, but for reduction size we can use 97,916.666...

Next, determine how much assets must be reduced from the current level of 355,000 to reach the target of 97,916.666...: Reduction = 355,000 − 97,916.666... = 257,083.333... dollars.

Now evaluate each answer option:

- Option "$257,083": This matches the calculated reduction of approximately 257,083.33 dollars when maintaining the same sales and aiming for a 2.4 TATO. It is the closest, and the exact figure before rounding is 257,083.333..., so this is consistent with the calculation.

- Option "$305,929": This would imply a much larger reduction, yielding a target asset level of 355,000 − 305,929 = 49,071 dollars, which would produce a TATO of 235,000 / 49,071 ≈ 4.795, far above the industry average. This misunderstands the goal of achieving 2.4, not a higher ratio.

- Option "$192,813": Reducing by 192,813 would leave assets at 162,187. TATO would then be 235,000 / 162,187 ≈ 1.45, which is lower than the industry average, meaning assets were not reduced enough to reach 2.4.

- Option "$275,079": Reduction of 275,079 leaves assets at 79,921. TATO would be 235,000 / 79,921 ≈ 2.94, still above 2.4, so this reduction is insufficient to reach the target ratio.

- Option "$208,238": Reduction of 208,238 leaves assets at 146,762. TATO would be 235,000 / 146,762 ≈ 1.60, which is well below 2.4, indicating too large an asset base reduction.

In summary, only the first option aligns with the calculation to bring the TATO down to the industry average of 2.4 while keeping sales unchanged, by reducing assets from 355,000 to about 97,917 dollars (a reduction near 257,083 dollars).

Business Finance Chapter 04 Quiz

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