Working capital problems

1. X& Y Ltd is desirous to purchase 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 firs t year’s working

You are given the following estimates and are instructed to add 10percent to your compound figure
to allow for contingencies

Particulars Amount for the year

Average amount backed up for stocks
Stocks of finished product Rs.5,000
Stocks of stores and material 8,000
Average credit given
Inland sales6 weeks credit 3,12,000
Export sales 1.5 weeks credit 78,000
Average time lag in payment of wages and
other outgoings
Wages 1.5 weeks 2,60,000
Stocks and materials 1.5 months 48,000
Rent and royalties 6 months 10,000
Clerical staff.5 month 62,400
Manager .5 month 4,800
Miscellaneous expenses 1.5 month 48,000
Payment in advance
Sundry expenses (paid quarterly in advance) 8,000
Undrawn profits on an average through out the 11,000
year
Set up your calculations for the average amount of working capital required

2. While preparing a project report on behalf of a client you have been collected the following
facts. Estimate the net working capital required for that project. Add 10 percent to your
computed figure to allow contingencies

Particulars Amount per unit

Estimated cost per unit of production
Raw material 80
Direct labour 30
Overheads(exclusive of depreciation Rs.10 per unit ) 60
Total cash cost 170

Additional information
Selling price Rs.200 per unit
Level of Activitiy 1,04,000 units of production per annum
Raw materials in stock average 4 weeks
 Work in progress (assume 50 percent completion stage in respect of coversion costs and 100
percent completion in respect of materials ) average 2 weeks
Finished goods stock average 4 weeks
Credit allowed by suppliers average 4 weeks
Credit allowed to customers average 8 weeks
Lag in payment of wages , average 1.5 weeks
Cash at bank is expected to be Rs.25,000
You may assume that production is carried on evenly throughout the year (52 weeks) and wages
and overheads accrue similiarly . All sales are on credit basis only

3. From the following data , compute the duration of the operating cycle for each of the two years
and comment on the increase/decrease

Particulars Year1 Year 2

Raw materials Rs. 20,000 Rs.27,000
Work in progress 14,000 18,000
Finished goods 21,000 24,000
Purchase of raw materials 96,000 1,35,000
Cost of goods sold 1,40,000 1,80,000
Sales 1,60,000 2,00,000
Debtors 32,000 50,000
Creditors 16,000 18,000
Assume 360 days per year for computations purposes