Problem:
Assume you manage a clothing retailer. You determine that the optimal time to keep inventory on hand is 45 days. This is the amount needed to keep clothing on the shelf of all sizes, but not too much that you have to put items on discount at the end of the season. You buy on credit, and your creditors do not charge interest until you are 45 days overdue. Thus, you pay them every 45 days. To attract the highest sales, you allow your customers to pay on credit. Half of customers pay with cash, and the other half pay on average over 60 days.
Required:
Question: What is your operating cycle and cash conversion cycle?
a) Operating cycle = 105; cash conversion cycle = 60
b) Operating cycle = 0; cash conversion cycle = 60
c) Operating cycle = 45; cash conversion cycle = 45
d) Operating cycle = 45; cash conversion cycle = -15
e) Operating cycle = 75; cash conversion cycle = 30
Note: Please show guided help with steps and answer.