Question

1. Custom Cars an accounts payable period of 42 days and an accounts receivable period of 36 days. The company turns over its inventory 12.8 times per year. What is the length of Custom Cars operating cycle and what is the length of Custom Car’s cash cycle? (please show how you arrive at your answer)

2. Patti’s Perfect currently has a 77 day operating cycle. The company is concentrating on increasing its inventory turnover rate from 6.5 times per year to 9.0 times. What will the firm's new operating cycle be if Patti can effectively make this change? (to the nearest whole year and please show how you arrive at your answer)

Answer 1

Question1. Operating Cycle= Inventory Period + Accounts Receivable Period

here Accounts Receivable Period= 36 Days

Inventory Period=365/ Inventory Turnover

here, Inventory Turnover =12.8

So, Inventory Period = 365/12.8 =28.52 Days

So, Length of Custom Cars operating cycle = 36+28.52 =64.52 or 65 Days

Cash Cycle=Inventory period+Accounts Receivable Period - Accounts Payable Period

here, inventory period =28.52 days, Accounts receivable period=36 days, accounts payable period=42 days

So, Custom Car's cash cycle = 28.52+36-42 =22.52 or 23 Days

Question2: Patti's Perfect current operating cycle=77 days

It's current inventory period =365/6.5 =56.15 days, where inventory turnover =6.5

So, Accounts Receivable Period= Operating Cycle - inventory period = 77 - 56.15 =20.85 days

now, if Patti can increase its inventory turnover rate to 9 times, then inventory period will be =365/9 = 40.56 Days

So, firm's new operating cycle will be = 40.56+20.85 =61.4 or 61 Days