Questions:
Pretty Lady Cosmetic Products has an average production process time of 40 days. Finished goods are kept on hand for an average of 15 days before they are sold. Accounts receivable are outstanding an average of 35 days, and the firm receives 40-days credit on its purchases from suppliers.
a. Estimate the average length of the firm's short-term operating cycle. How often would the cycle turn over in a year?
b. Assume net sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?
A supplier is offering your firm a cash discount of 2 percent if purchases are paid for within 10 days; otherwise the bill is due at the end of 60 days. Would you recommend borrowing from a bank at an 18 percent annual interest rate in order to take advantage of the cash discount offer? Explain your answer.