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Working Capital Management
QUESTION FOR PRACTICE

Q.1. Using the data, calculate the current working capital cycle for XYZ Ltd.
(Rs. In ‘000)
Sales 3,000
Cost of production 2,100
Purchases 600
Average raw material stock 80
Average work-in- progress 85
Average finished goods stock 180
Average creditors 90
Average debtors 350

Ans.

49 days, 15 days, 31 days ,43 days , 55 days, 83 days

Q.2. XYZ Ltd. has obtained the following data concerning the average working capital cycle for other companies in the same industry:
Raw material stock turnover 20 days
Credit received - 40 days
Work-in-progress turnover 15 days
Finished goods stock turn over 40 days
Debtors’s collection period 60 days
Using the following data , calculation the current working cycle for XYZ Ltd. and briefly comment on
(Rs. In ‘000 )
Sales (all credit) 6,000
Cost of production 4,200
Purchases (all credit) 1,200
Average raw material stock 190
Average work-in-progress 170
Average finished goods stock 360
Average creditors 150
Average debtors 700

Ans.

58 days, 15 days, 31 days, 43 days, 46 days, 101 days

Q.3. Following information is collected from the record of sunder of manufacturing Ltd. for the year 2008.
Rs.
Cost of goods sold 8,00,000
Cost of production 5,00,000
Raw Material consumed during the year 6,00,000
Average finished goods 40,000
Average work in process 30,000
Average Raw Material 50,000
Debtors collection period 45 days
Creditors payment period 30 days
Find out the operating cycle . How many operating cycle does the firm have in a year (360 days ).

Ans. 18 days, 22 days, 30 days, 45 days.

Q.4. XYZ Ltd. Sells its products on a gross profit of 20% of sales. The following information is extracted from its annual accounts for the year ending 31st December, 1998.
Rs.
Sales (for 3 months credit) 40,00,0000
Raw material 12,00,0000
Wages (15 days in arrears) 9,60,000
Manufacturing and General Expenses (one month in arrears) 12,00,000
Administration expenses (one month in arrears) 4,80,0000
Sale promotion expenses (payable half yearly in advance) 2,00,0000

The company enjoys one month’s credit from the suppliers of raw materials and maintains 2 months stock of raw material and 1½ months finished goods. Cash balance is maintained at Rs. 1,00,000 as a precautionary balance. Assuming a 10% margin, find out the working capital requirement of XYZ Ltd.

Ans. 16,39,000.

Q.5. Calculate the amount of working capital requirement for SRCC Ltd. From the following information.

Rs. (per unit)
Raw matieral 160
Direct labour 60
Overheads 120
Total cost 340
Profit 60
Selling price 400

Raw materials are held in stock on an average for one month. Material are in process on an average for half-a-month. Finished goods are in stock on an average for one month.
Credit allowed by suppliers is one month and credit allowed to debtors is two months. Time lag in payment of wages is 1 ½ weeks. Time lag in payment of overheads expenses in one month. One fourth of the sales are made on cash basis.
Cash in hand and at the bank is expected to be Rs. 50,000 and expected level of production amounts to 1,04,000 units for a year of 52 weeks.
You may assume that production is carried on evenly throughout the year and a time period of four weeks is equivalent to a month.

Ans. Ans. Rs. 67,10,000.

Q.6. JBC Ltd. Sells goods on a gross profit of 25%. Depreciation is considered as a part of cost of production. The following are the annual figures given to you.
Rs.
Sales (2 months credit) 18,00,000
Materials consumed (1 month credit) 4,50,000
Wages paid (1 month lag in payment) 3,60,000
Cash manufacturing expenses (1 month lag in payment) 4,80,000
Administrative expenses (1 month lag in payment) 1,20,000
Sale promotions expenses (paid quaterley in advance) 60,000

The company keeps one month’s stock each of raw materials and finished goods. It also keeps Rs. 1,00,000 in Cash. You required to estimate the working capital requirement of the company on cash cost basis, assuming 15% safety margin.

Ans. Working capital required is Rs. 4,45,625.

Q.7. Prepare a working capital forecast from the following information.
Production during the previous year was 10,00,000 units. The same level of activity is intended to be maintained during the current year.
The expected ratios of cost to selling price are:
Raw Material 40%
Direct Wages 20%
Overheads 20%
The raw material ordinarily remain in stores for 3 months before production. Every unit of production remains in the process for 2 months and is assumed to be consisting of 100% raw material, wages and overheads. Finished goods remain in the warehouse for 3 months. Credit allowed by creditors is 4 months from the date of the delivery of raw material and credit given to debtors is 3 months from the date of dispatch.
The estimated balance of cash to be held Rs. 2,00,000
Lag in payment of wages ½ month
Lag in payment of expenses ½ month
Selling price is Rs. 8 per unit. Both production and sales are in a regular cycle. You are required to make a provision of 10% for contingency (except cash). Relevant assumption may be made.

Ans. Working capital required is Rs. 44,53,334.

Q.8. You are required to prepare a statement showing the working capital needed to finance a level of annual activity of 52,000 units of output. The following information are available.

Element of Cost Rs. Per unit
Raw Material 8
Direct labour 2
Overheads 6
Total cost 16
Profit 4
Selling price 20

Raw material are in stock, on an average for 4 weeks. Material are in process, on an average, for 2 weeks. Finished goods are in stock, on an average, for 6 weeks. Credit allowed to customers is for 8 weeks. Credit allowed by suppliers of raw materials is for 4 weeks. Lag in payment of wages is 1 ½ weeks. It is necessary to hold ash in hand and at bank amounting to Rs. 75,000. It may be noted that production is carried on evenly during the year and wages and overheads accrue similarly.

Ans.

Working capital requirement for 52,000 units (i.e.., 1000 units per week) is Rs. 3,20,000.
Q.9. From the following information, Prepare a statement showing estimated working capital requirement:
(i) Projectd Annual sales 26,000 units.
(ii) Selling price per unit Rs. 60
(iii) Analysis of selling price Material 40%; Labour 30%; Overheads 20%; Profit 10%.
(iv) Time lag (on average)
      Raw material is stock 3 weeks.
      Production process 4 weeks.
      Credit to debtors 5 weeks.
      Credit to suppliers 3 weeks.
(v) Cash in hand is expected to be Rs. 32,000

Ans. Working capital requirement is Rs. 2,69,000.

Q.10. ABC Ltd. expects is cost of goods sold for 2000-2001 to be Rs. 600 lacs. The expected operating cycle is 90 days. It wants to keep a minimum cash balance of Rs. one lacs. What is the expected working capital requirement? Assume a year consists of 360 days.

Q.11. From the following information presented by a manufacturing company, prepare a working capital requirement forecast for the coming year : Expected monthly sales of 32,000 units @ Rs. 10 per unit. The anticipated ratios of cost to selling prices are :

Raw materials 40%
Labour 30%
Budgeted overheads Rs. 16,000 per week

Overheads expenses included depreciation of Rs. 4,000 per week. Planned stock will include depreciation of Rs. 4,000 per week. Planned stock will include raw materials for Rs. 96,000 and 116,000 units of finished goods.
Materials will stay in process for 2 weeks.
Credit allowed to debtors is 5 weeks.
Credit allowed by creditors is 1 month.
Lag in payment of overheads is 2 weeks.
25% of sales may be assumed against cash and cash in hand is expected to be Rs. 25,000.
Assume that production is carried on evenly throughout the year and wages and overhead accrue similarly. Assume also 4 weeks a month.

Ans. Working Capital requirement for a weekly sales of 8,000 units is Rs. 4,60,000. The overhead cost per unit is Rs. 1.50 (i.e.,(16,000-4,000 8,000) and cost of goods sold is 855 of selling price.

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