Working Capital Management – summary solution

Q 2) Estimation of duration of Operating Cycle

Assumptions: 365 days in a year, RM issued at the beginning of the production process,
manufacturing expenses incurred evenly throughout and WIP is complete to the extent of 50%,
all sales are on credit, creditors are only towards purchase of RM, all RM purchases are on
credit,

RM holding period 23.7 days

WIP holding period 16.52 days

FG holding period 25.35 days

Collection period 50 days

Payment period 22.72 days

(Payment period = Avg creditors/ Credit purchases per day)

Purchases 2016 = Consumption of RM 2016 + Closing RM Inventory – Opening RM inventory

= 231+20-10 = 241

Q 3) Estimation of Working Capital Requirement:

Assumptions: 360 days in a year, RM and supplies issued at the beginning of the production
process, Other expenses incurred evenly throughout the year and WIP units are finished only to
the extent of 50%, Administrative expenses are not included in valuing FG inventory,

RM Inventory 30L

Supplies Inventory 30L

WIP Inventory8.75L

FG Inventory 15.17L

Debtors 33.05L

Cash 6.25L

Creditors 6L (-)

Estimated WCap Reqmt 117.22L

Q 4)

a) 120 days, 3 times

b) Rs 60.40 lacs
c) Rs 1,20,800/-

Q 5) Plan C

Q 7) Impact on profit due to stricter collection policy:

Saving in bad debt expenses +23200

Savings due to reduction in investment in receivables (20% of (183058-124493)

+11713

Loss of contribution due to reduction in sale (7*500) -3500

Addition collection charges -20000

Net gain +11413

Q 8) (a)Cost of giving up cash discount (b)Recommendation

XYZ 10.24% ( Nominal rate) Forego discount

ABC 18.43% Avail the discount

YON 18.62% Avail the discount

For XYZ,

the cost of giving up discount (10.24% )is the nominal rate.

Nominal rate : 1/99 = .0101 for 36 days = .0101*365/36 = 10.24% p.a.

Effective annual rate can be calculated as follows :

EAR = ((1+.0101)^(365/36) )-1= Commented [SM1]: Not discussed in class yet. Ignore for
the time being
Repeat for ABC and YON

c) If YON allows payment period to be extended by another 20 days, cost of giving up

the cash discount = 2/98*(365/60)= 12.41%. Since bank funding is available at 15%, it is better
to forego the discount from supplier and therefore not borrow from bank to that extent.