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Case 4-63 The Operating Cycle
There are two retail stores in Millersburgh‘ One is a full-service store that typically sells on credit to its customers; the other is a smaller discount store that usually sells for cash. Full-service stores typically charge higher prices than discount stores for identical items.
Required:
Does the operating cycle suggest some economic reason for a portion of [his price difference? Explain your answer.
Concept Introduction:
Operating cycle:
Operating cycle is the chain of business activities performed in an organization. An organization can be manufacturing, servicing of merchandising type. For a merchandiser, the main business activities are the purchase, payment to the supplier, sales, and receipts from the customer. Hence the operating cycle of a merchandiser is limited as compared with the operating cycle of a manufacturer.
The Operating cycle mainly includes following activities:
-Purchases from the supplier (either cash or on account)
-Payment to suppliers
-Inventory
-Sales (either cash or on account)
-Collection from customer
The formula to calculate the operating cycle is as follows:
Net Operating Cycle = Inventory Period + Accounts Receivable Period − Accounts Payable Period
To Indicate:
The effect of the operating cycle on the difference in the prices of given stores.
The full service store has a longer operating cycle than the smaller discount store because it provides credit sales. Due to the longer operating cycle, the operating cost o...
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