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Problems in WC Estimation

The document contains 4 questions regarding the estimation of working capital requirements for different companies. It provides financial information such as sales, production levels, costs, inventory levels, credit terms and payment lags. It asks to calculate the working capital needed to sustain increased production levels based on the assumptions given and maintaining a safety margin.

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92 views3 pages

Problems in WC Estimation

The document contains 4 questions regarding the estimation of working capital requirements for different companies. It provides financial information such as sales, production levels, costs, inventory levels, credit terms and payment lags. It asks to calculate the working capital needed to sustain increased production levels based on the assumptions given and maintaining a safety margin.

Uploaded by

aparnahawaldar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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QUESTIONS ON ESTIMATION OF WORKING CAPITAL

1. Organics Ltd., is presently operating at 60% level, producing 36,000 units per annum. In view of
favorable market conditions, it has been decided that from I January 2010, the company would
operate at 90% capacity. The following information is available:
a. Existing cost price structure per unit is given below:
Raw Material Rs. 4.00
Wages Rs. 2.00
Overheads (Variable) Rs. 2.00
Fixed Overheads Rs. 1.00
Profits Rs. 1.00
b. It is expected that the cost of raw material, wage rate, expenses and sales per unit will
remain unchanged in 1997
c. Raw materials remain in stores for 2 months before these are issued to production.
These units remain in production process for 1 month.
d. Finished goods remain in the go down for 2 months
e. Credit allowed to debtors is 2 months. Credit allowed by creditors is 3 months
f. Lag in wages and overhead payments is 1 month. It may be assumed that wages and
overheads accrue evenly throughout the production cycle

You are required to

 Prepare profit statement at 90% capacity level


 Calculate the working requirements on an estimated basis to sustain the increased
production level. Assumptions made, if any, should be clearly indicated.

Ans : 72,000 and 145,500

2. 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 31 st March 2010.

Sales (at 3 months credit) Rs.40 lakhs


Raw material Rs.12 lakhs
Wages (15 days arrears) Rs.9.60 lakhs
Manufacturing and Gen Expenses (1 month in arrears) Rs. 12 lakhs
Administration expenses (1 month in arrears) Rs.4.8 lakhs
Sales promotion expenses (payable half yearly in advance) Rs.2 lakhs

The company enjoys one month’s credit from the suppliers of raw materials and maintains 2
months stock of raw materials and 1.5 months finished goods. Cash balance is maintained at Rs.
1 lakh as a precautionary balance. Assuming a 10% margin, find out the working capital
requirement of XYZ Ltd. (Ans: 14,52,000)
3. 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:

Sales ( 2 months credit) Rs.18 lakhs


Materials consumed (1 month credit) Rs. 4.50 lakhs
Wages paid (1 month lag in payment) Rs. 3.60 lakhs
Cash manufacturing expenses (1 month lag in payment) Rs. 4.80 lakhs
Administrative expenses (1 month lag in payment) Rs. 1.20 lakhs
Sales promotion expenses (paid quarterly in advance) Rs. 0.60 lakhs

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

Ans : 445,625

4. 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 materials 40%
Direct wages 20%
Overheads 20%
The raw materials 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 on 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 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 is Rs.2,00,000

Lag in payment of wages is half month

Lag in payment of expenses is half month

Selling price is Rs.8 per unit. Both production and sales are in regular cycle. You are required to
make a provision of 10% for contingency (except cash). Relevant assumptions may be made.

Ans: 44,53,334

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