Pretty Lady Cosmetic Products has an average production process time of forty days. Finished

QUESTION

Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstanding an average of thirty-five days, and the firm receives forty days of credit on its purchases from suppliers. a. Estimate the average length of the firms 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?
Operating Cycle = (Average Production Period Average Finished Goods Period Average Accounts Receivable Period) (Average Credit Period) Operating Cycle = (40 15 35) (40) Operating Cycle = 50 days Total number of operating cycles in a year = Days in a year/ Days of Operating Cycle = 365/50 = 7.3 times Average Receivables = Sales/365*Average collection period ==1200000/365 x 35 = $ 115068 Average Inventories = Raw

Material = =900000/365*40 $ 98,630 Finished Goods = =900000/365*15 $ 36,986 Average Inventories = $ 1,35,616 Account Payable = =900000/365*40 $ 98,630 Total Financing Required = Accounts Receivable Average Inventories Accounts Payable = $ 115068 $ 135616 $ 98630 = $ 152055

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