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Please answer these two problems and show work.
Problem 1
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 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?
Problem 2
A supplier is offering your firm a cash discount
of 2 percent if purchases are paid for within ten days; otherwise, the bill is
due at the end of sixty days. Would you recommend borrowing from a bank at an
18 percent annual interest rate to take advantage of the cash discount offer?
Explain your answer.
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