Pondicherry University

Department of Management Studies

Financial Management
Working Capital
Test 3

1) X & Co., desires to purchases a business and has consulted you and one point on which
you are asked to advise them is the average amount of working capital which will be required
in the first years working.
You are given the following estimates and are instructed to add 10% to your computed
figures to allow for contingencies.
(1) Average amount locked –up in stocks figure for the year
Stock of finished goods 5000
Stock of stores and materials 8000
(2) Average credit given
Inland sales- 6 weeks 3,12,000
Export Sales-1.5 weeks 78,000
(3) Lag in payment of wages & other outgoings
Wages -1.5 weeks 2,60,000
Stores, materials, etc- 1.5 months 48,000
Rent, royalties -6 months 10,000
Clerical staff -0.5 month 62,400
Manager – 0.5 month 4,800
Miscellaneous - 1.5 months 48,000
(4) Payment in advance
Sundry Expenses (paid quarterly in advance) 8,000
(5) Undrawn profits on the average amount of working capital required. 11,000
Set up your calculations for the average amount of working capital required

2) From the following information, you are required to estimate the net working capital:
Raw materials 400
Direct labour 150
Overheads (including depreciation) 300
Total cost 850
Additional information
Selling price –Rs. 1000 per unit
Out- put-52,000 units
Raw material in stock –average four weeks
Work in progress (assumption stage with full material consumption) – average 2 weeks
Finished goods in stock- average 4 weeks
Credit allowed by suppliers –average 4 weeks
Credit allowed to debtors average 8 weeks
Cash at bank is expected to be Rs. 50,000
Assume that production is sustained at even pace during the 52 weeks of the year. All sales
are on credit basis.

3) From the following information prepare a statement showing working capital requirement
Sales for the year 12000 units
Cost
Raw materials Rs. 10 per unit
Labour Rs.6 per unit
Overhead Rs.4 per unit
Total Rs. 20 per unit
Additional information:
a) Raw materials are in stock on an average for one month.
b) Materials are in process on an average for 2 months
c) Finished goods are in stock on an average for 3 months
d) Credit allowed to customer four months
e) Credit allowed by suppliers two months
It may be assumed that production and overhead accrue throughout the year

4) You are the management accountant of Sathisha ltd. The following information is made
available to you
a) Budgeted production – 6,00,000 units
b) Details of stock holding: Raw material – 2 months; Work-in-progress – 0.5
month; Finished goods – 1 month
c) Credit granted to customers -2 months, credit availed from suppliers – 1 month
d) Minimum cash balance required at all times – Rs 25,000
e) Cost structure of the product is as under
Rs
Raw material 10.00
Direct labour 2.50
Overhead (of which depreciation –Rs0.25) 7.50
Total 20.00
Profit Margin 5.00
Selling price 5.00
From the above you are required to forecast the working capital requirements of
the company using
a) Cost approach
b) Cash cost approach
c) Total approach

5) The marketing manager of XY limited is giving a proposal to the Board of Directors of the
company that an increase in credit period allowed to customers from the present 1 month to 2
months will bring a 25% increase in sales volume in the next year.
 The following operational data of the company for the current year are taken from the
records of the company:
a. Selling price Rs 21 per unit
b. Variable cost Rs 14 per unit
c. Total cost Rs 18 per unit
d. Sales value Rs 18,90,000

The Board, by forwarding the above proposal and data requests you to give your expert
opinion on the adoption of the new credit policy in next year subjects to a condition that
the company’s required rate of returns on investment is 40%.

6)MN limited has a current turnover of Rs. 30,00,000 p.a. Cost of Sale is 80% of turnover
and Bad Debts are 2 % of turnover. Cost of Sales includes 70% Variable Cost and 30% Fixed
Cost, while Company’s required rate of return is 15%. MN limited currently allows 15 days
credit to its customer, but it is considering increasing this to 45 days credit in order to
increase turnover.

It has been estimated that this change in policy will increase turnover by 20%, while Bad
debts will increase by 1%. It is not expected that the policy change will result in increase in
fixed cost and creditors and stock will be unchanged.

Should MN limited introduce the proposed policy? (Assume a 360 -day year)

7) H Ltd has at present annual sales level of Rs 10,000 units at Rs 300 per unit. The variable
cost is Rs 200 per unit and fixed cost amount to Rs 3, 00,000 per annum. The present credit
period allowed by the company is 1 month. The company is considering a proposal to increase
the credit period to 2 months and 3 months and has made the following estimates:
Existing Proposed
Credit period (month) 1 2 3
Increase in sales (percent ) - 15 30
Bad debts (percent) 1 3 5

There will be increase in fixed cost by Rs 50,000 on account of increase in sales beyond 25
percent of present level. The company plans a pre-tax return of 20 percent on investment in
receivables. You are required to calculate the most paying credit policy for the company

8) ABC Ltd. Is considering relaxing its credit policy and evaluating two proposed plans.
Currently, the firm has credit sales amounting to Rs.50, 00,000 and accounts receivables of Rs.
12, 50, 000. The current level of loss due to bad debts is Rs. 1,50,000. The firm is required to
give a return of 20% on investment in the new (additional) accounts receivable. The company’s
variable costs are 70% of the selling price. The following information given:
Particulars Present Plan Proposed Plan I Proposed Plan II
Annual Credit Sales (Rs.) 50,00,000 60,00,000 67,50,000
Accounts Receivable (Rs.) 12,50,000 20,00,000 28,12,500
Bad Debt Losses (Rs.) 1,50,000 3,00,000 4,50,000
What will be the most rewarding credit plan in cash for ABC Ltd. under these circumstances?

9) Golden syntax has annual sales of Rs 24,00,000. The selling price per unit is Rs 10 and the
variable cost is 70 per cent of the selling price. The required rate of return on investment is 20
per cent, average cost, Rs 9 per unit; annual collection expenditure, Rs 50,000 and percentage
of default, 3 per cent; credit terms, 2 months. Golden syntax is considering the change in credit
policy by following Programme A or Programme B.
Programme
A B
Average collection period (months) 1.5 1
Average collection expenditure (Rs) 75,000 1,50,000
Percentage of default (%) 2 1

10)i)A firm’s inventory planning period is one year. Its inventory requirement for this period
is 1,600 units. Assume that its acquisition cost is ₹ 50 per order. The carrying costs are
expected to be ₹1 per unit per year for an item.
The firm can procure inventories in various lots as follows: i) 1,600 units, ii) 800 units,
iii) 400 units, iv) 200 units, and. Which of these order quantities is the economic order
quantity?

10)ii)A firm is able to obtain quantity discount on its order of material as follows

Price per tonne Rs Tonnes

6.00 Less than 250
5.90 250 and less than 800
5.80 800 and less than 2,000
5.70 2000 and less than 4,000
5.60 4000 and over

The annual demand for the material is 4,000 tonnes. Stock holding costs is 20% of
material cost per annum. The delivery cost per order is Rs.6. You are required to
calculate the best quantity to order
11) A firm has a fixed consumption of 24000 units of a component which is purchased at a
normal price of Rs.24 per unit. The cost of placing an order is estimated at Rs.600. The
company uses an inventory carrying rate of 30% per annum.
The supplier offers the following lot purchase price schedule-
Lot Range Units Price per Unit (Rs.)
1-2999 24.00
3000-5999 22.80
6000-11999 22.00
12000& over 21.50
Determine the optimal ordering policy.
12) i) Calculate the minimum stock level, maximum stock level and re-order level from the
following information:
Minimum consumption 100kgs per day; Maximum consumption 150kgs per day; normal
consumption 120kgs per day ; Re-order period 10-15 days; Re-order quantity 1500kgs;
Normal re order period 12 days; Time for emergency supplies 3 days.

12)ii)The following are the particulars related to inventory of Ram Ltd.

a. Orders must be placed in multiples of 100 units.
b. Annual requirement (360days)300,000 units
c. Purchase price per unit is Rs. 3
d. Semiannual carrying cost 12.5% of the purchase price of goods.
e. Cost per order placed is Rs.20
f. Desired safety stock is 10,000 units
g. 3 days are required for delivery (lead time)
Calculate:
(i) EOQ
(ii) How many orders should be placed every year?
(iii) At what inventory level should an order be placed?

13)i) Nico’s Manufacturing Limited uses 2400 units of a product per year on a continuous
basis. The product carrying costs are 60 per unit per year and ordering costs are ‘250 per
order’
a. Calculate the EOQ (round up to nearest whole value)
b. Calculate the total cost per year to order and carry this item
c. Their supplier has notified the company that if they increase the order quantity by 58
units they will give the company a discount. Calculate the rupee discount that the
company will have to give Nico’s Manufacturing to result in a net benefit to the
company.
13)ii) A company manufactures a product from a raw material, which is purchased at ₹60 per
kg. the company incurs a handling cost of ₹360 plus freight of ₹390 per order. The incremental
carrying cost of inventory of raw materials is ₹0.50 per kg per month. In addition, the cost of
working capital finance on the investment in inventory of raw material is ₹9 per kg per annum.
The annual production of the product is 100000 units and 2.5 units are obtained from one kg
of raw material.
a. Calculate the economic order quantity of raw materials.
b. Advise, how frequently should orders for procurement be placed.
If the company proposes to rationalise placement of orders on quarterly basis, what
percentage of discount in the price of raw materials should be negotiated

14) i) Total demand for a commodity is 100 tonnes in time T. The carrying cost is Rs. 10 per
tonne of stock during the time T and the order cost is Re. 1 per order. Find out the EOQ, number
of order, no of days EOQ last for. The supplier provides discount at the rate of Re. 0.10 each
tonne, if the purchase amount is at least 8 tonnes. Should the firm place an order for 8 tonnes
in order to get the discount?
14)ii) Requirement is 4.472 tonnes (R), holding cost is Rs.10 per tonne. Rate of production
per day (p) is 0.300 tonnes, rate of demand per day (u) is 0.274 tonnes and Stock out cost per
unit per annum is Rs.50. Find out safety stock

15) Classify the following items into ABC

S. No Units Consumed Average Cost per unit
1 20,000 60.80
2 10,000 102.40
3 32,000 11.00
4 28,000 10.28
5 60,000 3.40
6 30,000 3.00
7 20,000 1.3

16) i)A firm disburses Rs. 20 lakh every year. The conversion charge is Rs.40 per conversion.
The current risk free interest rate is 10%. Calculate the optimal cash balance.

16)ii)A firm maintains a minimum cash balance of Rs. 10,000. Standard deviation of the
daily cash flow is Rs. 2,000. The annual interest rate is 10%. The conversion cost is Rs. 40
per transaction. Find out the upper limit, return point and average cash balance.

17) i)The following information is provided by the DPS limited for the year ending 31 March
10, 2020
Raw material storage period 50 days
Work-in-progress conversion period 18 days
Finished goods storage period 22 days
Debt collection period 45 days
Creditors payment period 55 days
Annual Operating cost (Including depreciation of Rs21,00,00
Rs.2,10,000)
1 year = 360 days

You are required to calculate

i) Operating cycle period
ii) Number of operating cycle in a year
iii) Amount of working capital required for the company on a cash cost basis
iv) The company is a market leader in its product, there is virtually no competitor in
the market. Based on a market research it is planning to discontinue sales on credit
and deliver products based on pre-payments. Thereby, it can reduce its working
capital requirement substantially. What would be the reduction in working capital
requirement due to such decision?
17) ii)The following information is available in respect of a trading firm:
(i) On an average, debtors are collected after 45 days; inventories have an average holding
period of 75 days and creditors payment period on an average is 30 days.
(ii) The firm spends a total of Rs. 120 lakh annually at a constant rate.
(iii) It can earn 10 per cent on investments.
From the above information, compute: (a) the cash cycle and cash turnover, (b) minimum
amounts of cash to be maintained to meet payments as they become due, (c) savings by
reducing the average inventory holding period by 30 days.

18) The following results are expected by XYZ Ltd., by quarters next year, in thousands of
rupees.
Quarter
Particulars
1 2 3 4
Sales 7,500 10,500 18,000 10,500
Cash payments:
Production costs 7,000 10,000 8,000 8,500
Selling, administrative and other costs 1,000 2,000 2,900 1,600
Purchases of plant and other fixed costs 100 1,100 2,100 2,100
The debtors at the end of a quarter are one-third of sales for the quarter. The opening balance
of debtors is Rs. 30,00,000. Cash on hand at the beginning of the year is Rs. 6,50,000 and the
desired minimum balance is Rs. 5,00,000. Borrowings are made at the beginning of quarters
in which the need will occur in multiples of Rs. 10,000 and are repaid at the end of quarters.
Interest charges may be ignored. You are required to prepare:
(a) a cash budget by quarters for the year; and
(b) state the amount of loan outstanding at the end of the year.

19) What are the sources of working capital finance?

20) What are the factors influencing size of working capital?