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Working Capital Requirement: Questions

1. Calculate operating cycle period in days; a. Period covered 365 b. Average period of credit allowed by suppliers - 16 days. c. Average debtors outstanding 480 (in 000s) d. Raw material consumption 4400 (in 000s) e. Total production cost Rs.10,000 f. Total cost of goods sold Rs.10, 500 g. Sales for the year Rs.16,000 h. Value of the average stock maintained;
i. Raw material 320 (in 000s) ii. WIP 350 (in 000s) iii. Finished goods 260 (in 000s) Solution: a. b. c. d. e. f. Raw material 27 days WIP 13 days Finished goods 9 days Debtors 11 days TOCP 60 days NOC 44 days Per unit 50 20 40 110 20 130

2. Particulars
a. Raw material b. Direct Labour c. Overheads (including Depreciation of Of Rs.10) Total cost Profit Selling price Raw material -1 month.

WIP month. Suppliers 1 month. Debtors 1 month. Lag in payment of wages 10 days. Overheads 30 days. 25% of sales are on cash basis. Cash balance Rs.1,00,000 Finished goods 1 month. Units produced 54,000 units.

Compute the working capital requirement. Solution: Working capital 9, 47,500

3. Particulars

a. Raw material b. Direct labour c. Overheads d. Profits e. Selling price Raw material 2 months. Processing time 1 month. The degree of completion is 50% in respect of all elements of cost. Finished goods 1 month Lag in payment of wages 1 months Debtors 2 months Suppliers 1 month 20% of output is sold against cash Cash balance 1,00,000 Units produced 1,44,000

Per unit 45 20 40 15 120

Prepare working capital forecast after adding 1/3rd for contingency. Solution: Net working capital 59, 50,564

4. G ltd is presently operating at 60% level, producing 36,000 units P.A.

Now the company wants 90% capacity. Raw material Rs.4/unit Wages Rs.2/unit Overheads (Variable) Rs.2 Overheads (Fixed) Re.1 Profits Re.1 It is expected that cost of raw material, wage rate, expenses and sales/unit will remain unchanged. Raw material remains in store for 2 months, processing 1 month, finished goods 2 months Debtors 2 months, creditors 3 months Lag in payment in wages and overhead 1 month

a. b. c. d.

Prepare profit statement at 90% capacity and also prepare Working capital forecast. Solution: Profit statement at 90% capacity 72,000 Net working capital 1, 56,000

5. Calculate working capital requirement by adding 10% for

contingencies; Estimated cost per unit Rs.170 (includes raw material Rs.80, Direct labour Rs.30, overheads exclusive of depreciation Rs.60) Selling price Rs. 200/unit Units produced 1,04,000 Raw material 4 weeks WIP (assume 50% completion stage) 2 weeks Finished goods 4 weeks Suppliers 4 weeks Debtors 8 weeks Lag in payment of wages 1.5 weeks Cash Rs.25,000

Assume 52 weeks in a year. All sales on credit basis. Consider debtors at cost. Solution: Net working capital 49, 66,500

6. X ltd sells goods at a G.P of 20%. It includes depreciation as a part of

cost of production. The following information is for 12 months. Prepare working capital requirement on cash cost basis. Assumptions: 1. A safety margin of 15% will be considered 2. Cash will be held to the extent of 50% of current liabilities 3. No WIP 4. Tax ignored Sales at 2 months credit 27,00,000 Materials consumed (suppliers) credit 2 months 6,75,000 Total wages (paid at the beginning of next month) 5,40,000 Manufacturing expenses outstanding at the end of the year (these expenses are paid 1 month in arrears) 60,000 Total administrative expenses (paid as above) 1,80,000 Sales promotion expenses paid quarterly in advance. Stock of raw material and finished goods are kept at 1 months requirement.

Solution: Net working capital 5, 64,938

7. A ltd has a GP of 25%. Depreciation is considered as a part of cost of

production. Following are the figures (annually); Sales (2 months credit) 18,00,000 Materials consumed (1 months credit) 4,50,000 Wages paid (1 month lag in payment) 3,60,000 Cash manufacturing expenses (1 month lag) 4,80,000 Administrative expenses (1 month lag) 1,20,000

Sales promotion expenses paid quarterly in advance 60,000 The company keeps 1 months stock each of raw material and finished goods Cash 1,00,000 Prepare Working capital required on cash cost basis and add 15% as safety margin. Solution: Net working capital 4, 45,625

8. S ltd has a capacity of producing 1.25 lakh tonnes of cement P.A. Its
present capacity utilization is 80%. The company supplies cement in 200 kgs drum. Calculate net Working capital on the basis of following cost sheet; Particulars Cost Per drum a. Gypsum (G) 25 b. Limestone (L) 15 c. Coal (C) 30 d. Packing material 10 e. Direct labour 50 f. Factory overhead (including depreciation Of Rs.10) 30 g. Administrative overhead 20 h. Selling overhead 25 Total cost 205 (+) profit margin 45 Selling price 250 (+) 10% of selling price (sale tax) 25 Invoice price 275 Holding period of raw materials G 3 months, L 1 month, Coal 2.5 months, packing material 1.5 months Processing time month (assume full units G, L and Coal are required in the beginning, others taken at 50%)

Finished goods 1 month Debtors 3 months Lag in payment of sale tax 1 months Lag in wages month Overhead 1 month Suppliers a. G 2 months, Coal 1 month, Packing material month Cash balance 25,00,000

Calculate Working capital requirement. Solution: Net working capital 3, 79, 16,667

9. A ltd is currently producing 2000 units/month. Now it wants to

increase monthly production to 4000 units. A quantity discount of 10% on all purchases of raw materials is expected from suppliers. Selling price, variable and fixed cost would remain the same. Income statement: Sales (24,000X18) (-) Raw material (24,000X6) Wages variable (24,000X3) Wages Fixed Overhead variable (24,000X1) Overhead Fixed

4, 32,000 1, 44,000 72,000 48,000 24,000 96,000

3, 84,000 48,000

Customers 3 months Suppliers 2 months Wages and overhead month Finished goods at present is maintained at 4,500 units Raw material 3 months WIP 1 month (valued at prime cost)

Prepare Income statement for next year and also calculate present and future working capital requirement. Solution: Net working capital (2000 units) 1, 92,000 Net working capital (4000 units) 3, 05,600

10.Crimson industries Ltd is desirous of assessing its working capital

requirements for the next year. The finance manager has collected the following information for the purpose. Estimated cost per unit of finished product: Particulars Raw materials Direct labour Manufacturing and administrative overhead (Excluding depreciation) Depreciation Selling overheads Total cost 40 20 30 230 Cost Per unit 90 50

The product is subject to excise duty of 10% (levied on cost of production) and is sold at Rs. 300 per unit. Additional information: a. Budgeted level of activity is 1, 20,000 units of output for the next year. b. Raw material cost consists of the following; Pig iron Rs. 65 per unit, Ferro alloys 15 per unit, and Cast iron borings 10 per unit c. Raw materials are purchased from different suppliers, extending different credit period:


e. f. g.

h. i.

Pig iron 2 months, Ferro alloys month, and Cast iron borings 1 month. Product is in progress for a period of month. Production process requires full unit (100%) of pig iron and Ferro alloys in the beginning of production; cast iron boring is required only to the extent of 50% in the beginning and the remaining is needed at a uniform rate during the process. Direct labour and other overheads accrue similarly at a uniform rate throughout production process. Past trends indicate that the pig iron is required to be stored for 2 months and other materials for 1 month. Finished goods are in stock for a period of 1 month. It is estimated that one-fourth of total sales are on cash basis and the remaining sales are on credit. The past experience of the firm has been to collect the credit sales in 2 months. Average time lag in payment of all overheads is 1 month and months in the case of direct labour. Desired cash balance is to be maintained at Rs. 10 lakhs.

You are required to determine the amount of net working capital of the firm. State your assumptions, if any. Solution: Net working capital 60, 37,500