Problem 10.

1
From the following information taken from the books of a
manufacturing concern, compute the operating cycle in days
manufa
Period covered 365 days

Average period of eredit allowed by suppliers 16 days

Poamblu in '000)
480
Average Debtors outstanding
Raw materials consumption- 4,400

Total Production cost 10,000

Total Cost of Goods Sold 10,500

Sales for the year 16,000

Value ofaveragestock maintained:

320
Raw Materials
350
Work-in-progressS
T6 Toto eperauy 260
Finished

Solution
goods
lepeuvd
Problem 10.2
XYZ Ltd. has obtained the following data concerning the
average working capital cycle for other companies in the
sameindustry:
Raw material stock turnover 20Days
Credit received 40Days
Work-in-progress turnover 15 Days

Finished goods stock turnover 40Days

Debtors's collection period 60 Days
95 Days

the current working capi-

Using the following data, calculate
tal cycle for XYZ Ltd. and briefly comment on
it.

in '000)
3,000
Sales
2,100
Cost ofProduction
600
Purchases
stock -80
Average Raw Material
85
Average Work-in-progress
180
Finished Goods stock
Average
90
Average Creditors
350
Average Debtors
Solution:
 WORKING CAPITAL

oblem 10.8
The following are the extracts from the Balance sheet of
company as on 31-12-2010. You arerequired to compute the
additional
working capital required by the company for the
next year.

Balance Sheet (Extracts) as on 31-12-2010

Fixed Assets:
Land and Buildings 5,00,000
Plant and Machinery 8,00,000
3,00,000
Current Assets:
Stock 8,00,000
Debtors 3,00,000
Cash and Bank 2,00,000 13,00,000
Less: Current Liabilities:

Creditors 3,40,000
Taxation 80,000
Bank Overdraft 1,40,000

Outstanding Liabilities
1,60,000 7,20,000 5,80,000

(
13,80,0000

Additional information:

It is estimated that Sales will increase by 25% next year.

(in Maximum amount of Bank Overdraft will be only
T1,60,000.

(i) There will be no increase in tax liability dueto increase in

exports.

(iv) Period of credit allowed to customers and the stock

turnover will remain unaltered.

() Period of credit allowed by creditors will also remain the

same. Outstanding Liabilities will remain at the same
relative position.

(vi) There will be no increase in total amount of Cash and

Bank balances.
Problem 10.9
The cost sheet of PQR Ltd. provides the following data:

Cost per unit

Raw material 50
Direct Labour 20
Overheads (including depreciation of 7 10) 40
Total cost 110
Profits 20

Selling price
130
Average raw material in stock is for one month. Average
material in work-in-progress is for half month. Credit allowed
by suppliers: one month; credit allowed to debtors one
month. Average time lag in payment of
wages: 10 days;
average time lag in payment of overheads 30 days. 25% of the
sales are on cash basis. Cash balance expected to beT 1,00,000.
Finished goods lie in the warehouse for one month.

You are required to prepare a statement of the working

capital needed to finance a level of the activity of 54,000 units
of output. Production is carried on evenly throughout the
year and wages and overheads accrue similarly. State your
assumptions, if any, clearly.
Solution:
As the annual level of activity is given at 54,000 units, it means
that the monthly turnover would be 54,000/12= 4,500 units.
turnover
The working capital requirement for this monthly
can now be estimated as follows:
CAPITAL MANAGEMENT *

Problem 10.10|

The following information hasbecn cxtracted from the records

of a Company:
Product cost sheet
Raw materials 45
Direct labour 20
Overheads 40
Total 105
Profit 15

Selling price 120

.
- Raw materials arein stock on an averagefortwo months.
- The materials are in process on an averagefor one month.
The degree of completionis 50% in respect of all elementsof
cost.

- Finished goods stock on an averageis for one month.

- Time lag in payment of wages and overheads is 14 weeks
- Time lag in receipt of proceeds from debtors is 2months.
- Credit allowed by suppliers is onemonth.

-20% of the output is sold against cash. "

- The company expects to keep a Cash balance of7 1,00,000.

TheCompany is poised for a manufacture of 1,44,000 units in

the next year.
You are required to preparea statementshowing the Work
ing Capital requirement of the Company.

Solution:
 Problem 10.11
Grow More Ltd. is presently operating at 60% level, producing
36,000 units per annum. In view of favourable market condi-
tions, it has been decided that from 1st January 2011, the

Company would operateat 90% capacity. The following infor

mations are available:
Existing cost-price structure per unit is given below:

Raw material 4.00

Wages 2.00

Overheads (Variable) 2.00

Overheads (Fixed) atptod leut oh 36bo 1.00

Profits 1.00

(i expected that the cost of raw material, wages rate,

It is

expenses and sales per unit will remain unchanged in

2011.

(ii) Rawmaterials remain in storesfor2months before these

are issued to production. These units remain in produc-
tion process for 1 month.

iv) Finished goods remain in godown for 2 months.

() Credit allowed to debtorsis 2 months. Credit allowed by
creditors is 3months
is month. It may
Lag in wages and overhead payments
1
(vi)
be assumed that wages and overhead accrue evenly
throughout the production cycle.
You are required to:

(a) Prepare profit statementat 90% capacity level; and

(b) Calculate the working requirements on an estimated

basis to sustain the increased production level.

Assumptions made if any,should be clearly indicated

stock.

Problem 10.12

The management of Royal Industries has called for a state-

ment showing the working capital to finance a level of activity
for
of 1,80,000 units of output for the year. The cost structure
level
the company's product for the above mentioned activity
is detailed below:
Cost per unit

Raw material 720

5
Direct labour
Overheads (including depreciation of 5 per unit) 15
40

Profit
:. 10
50
Selling price

Additional information:
is 20,000.
(a) Minimum desired cash balance

(b) Raw materials are held in stock,on an average, for two

months.
() Work-in-progress (assume 50% completion stage for all
elements) will approximate to half-a-month's produc-
tion.

(d) Finished goods remain in warehouse, on an average, ror

a month.
() Suppliers of materials extend a month's credit and debt
ors are provided two month's credit; cash sales are 25% of
total sales.

Thereis a time-lag in payment of wages of a month; and

half-a-month in the case of overheads.

From theabovefacts, you are required toprepareastatement

showing working capital requirements.

Solutiau :
 Problem 10.13
From the following prepare the working capital re-
details,
quirement forecast: Production during theprevious year was
1,20,000 units. It is planned that this level of be
activity would
maintained during the present year. The
expected ratios of
the Cost to Sellingprices are:Rawmaterials 60%.
Direct wages
10%,Overheads 20%.Raw materials areexpected to remain in
store foran average of 2months before issue to
production.
Each unit is expected to be in process for one month, the raw
materials being fed into the pipeline
immediately and the
labour and overhead costs accruing evenly
during themonth.
Finished goodswill stay in thewarehouse awaiting
dispatch to
customers for approximately 3 months. Credit allowed by
 creditors is 2 months from the date of delivery of raw mate-
rials. Credit allowed to debtors is 3months from the date of
dispatch. Selling price is 5
per unit. There is a regular
production and sales cycle. Wages and Overheads arepaid on
the 1st day of each month for the previous month. The
company normally keeps cash in hand to the extent of
T 40,000. Debtors to be considered at sales price.
 Problem 10.14
Etech Ltd. plans to sell 30,000 units next year. The expected
Lt
Hi-tech
of sold is as follows:
cost goods
(Per Unit)
100
Raw material
30
Manufacturing expenses
and financial expenses 20
Selling, administration
200
Selling price
is
The duration at various stages of the operating cycle
expected to be as follows:
Raw material stage 2 months
1 month
Work-in-progress stage
Finished stage
h month
Debtors stage 1 month
of 2,500 units, estimate the
Assuming the monthly sales level
gross working capital requirementif the
desired cash balance
is5% of the gross working capital requirement, and work-in-
progress is 25% complete with respect to manufacturing
expenses.
Solution
can also be valued at 30.

Problem 10.15|
Calculate theamount of working capital requirement for
SRCC Ltd. from the following information:
(Per Unit)
Raw material 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.
Materials 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

1%
to debtors is two months. Time lag in payment of wages is
one
weeks. Time lag in payment of overhead expenses is
month. One fourth of the sales are made on cash basis.
and
Cash in hand and at the bank isexpected to be? 50,000:
level of amounts to 1,04,000 units for a
expected production
year of 52 weeks.
is carried on evenly through-
Youmay assume that production
of four weeks is equivalent to
out the year and a time period
a month.