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Maga inc currently has 140 day operating cycle
Maga inc currently has 140 day operating cycle. The company wants to increase inventory turnover from 5.0 times per year to 8.9 times. What will be the firm's new operating cycle be if they can make this change?
Expert Solution
Computation of Firm's New Operating Cycle if they increase inventory turnover from 5.0 times per year to 8.9 times:
Operating Cycle = Inventory Period + Receivables Period
140 = (365 Days / Inventory Turnover) + Receivables Period
140 = ( 365 /5 ) +Receivables Period
140 = 73 + Receivables Period
Receivables Period = 140 - 73
Receivables Period = 67
When the Inventory Turnover Rate changes to 8.9 Times,
New Operating cycle = ( 365 /8.9) + 67
= 41.01 + 67
New Operating Cycle = 108.01 or 108 days.
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