Pretty Lady Cosmetic Products has an average production process time of 40 days. Finished foods 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 of credit on its purchases from suppliers.
Estimate the average length of the firm's short-term operating cycle. How often would the cycle turn over in a year?
The average length of the firm's short-term operating cycle is 90 days. The cycle would turn over 4 times in a year.
To estimate the average length of the firm's short-term operating cycle, we need to calculate the total number of days it takes for the entire process from production to collection of receivables.
The short-term operating cycle consists of three components:
1. Production Process Time: 40 days
2. Finished Goods Holding Time: 15 days
3. Accounts Receivable Collection Time: 35 days
Adding these three components together:
Short-term operating cycle = Production process time + Finished goods holding time + Accounts receivable collection time
= 40 days + 15 days + 35 days
= 90 days
The average length of the firm's short-term operating cycle is 90 days.
To determine how often the cycle would turn over in a year, we need to calculate the number of operating cycles in a year.
Number of operating cycles = Number of days in a year / Short-term operating cycle
= 365 days / 90 days
= 4.06
Therefore, the short-term operating cycle would turnover approximately 4.06 times in a year.
To estimate the average length of the firm's short-term operating cycle, we need to add the average production process time, the time finished goods are kept on hand before being sold, and the accounts receivable outstanding:
Average length of short-term operating cycle = Average production process time + Time finished goods are kept on hand + Accounts receivable outstanding
Given:
Average production process time = 40 days
Time finished goods are kept on hand = 15 days
Accounts receivable outstanding = 35 days
Substituting these values into the formula, we get:
Average length of short-term operating cycle = 40 days + 15 days + 35 days
Average length of short-term operating cycle = 90 days
So, the average length of the firm's short-term operating cycle is 90 days.
To determine how often the cycle turns over in a year, we need to calculate the number of cycles in a year:
Number of cycles in a year = Number of days in a year / Average length of short-term operating cycle
Since there are typically 365 days in a year, substituting the values into the formula, we get:
Number of cycles in a year = 365 days / 90 days
Number of cycles in a year ≈ 4.06
Therefore, the short-term operating cycle for the firm turns over approximately 4.06 times in a year.