Fixed Asset Turnover Ratio
Response to the following problem:
Waystation Company reported the following asset values in 2008 and 2009:
2009 2008
Cash $ 40,000 $ 30,000
Accounts receivable 500,000 400,000
inventory 700,000 500,000
Land 300,000 200,000
Building 800,000 600,000
Equipment 400,000 300,000
In addition, Waystation had sales of $4,000,000 in 2009. Cost of goods sold for the year was $2,500,000
As of the end of 2008, the fair value of Waystation's total assets was $2,500,000. Of the excess of fair value over book value, $50,000 resulted because the fair value of Waystation's inventory was greater than its recorded book value. As of the end of 2009, the fair value of Waystation's total assets was $3,500,000. As of December 31, 2009, the fair value of Waystation's inventory was $100,000 greater than the inventory's recorded book value.
Required:
1. Compute Waystation's fixed asset turnover ratio for 2009.
2. Using the fair value of fixed assets instead of the book value of fixed assets, recompute Waystation's fixed asset turnover ratio for 2009. State any assumptions that you make.
3. Interpretive Question: Waystation's primary competitor is Handy Corner. Handy Corner's fixed asset turnover ratio for 2009, based on publicly available information, is 2.8 times. Is Waystation more or less efficient at using its fixed assets than is Handy Corner? Explain your answer.