FINANCIAL MANAGEMENT

Problems on Working Capital Management

1. The following data are available for R. Ltd.
Sales = Rs. 14,00,000
Purchases = Rs. 5,35,000
Annual consumption of raw material = Rs. 5,40,000
Cost of production = Rs. 8,32,000
Cost of goods sold = Rs. 10,82,000
Average stock of raw material = Rs. 1,72,500
Average stock of WIP = Rs. 46,500
Average stock of finished goods = Rs. 1,75,000
Average debtors = Rs. 2,37,500
Average creditors = Rs. 1,75,000

Calculate the operating cycle and working capital required.

2. The following data are available for Keltron Pvt. Ltd., for the year ending 31-3-1999. Calculate
operating cycle. Assume 360 days in a year.

Sales = Rs. 1,75,000

Purchases = Rs. 45,000
Consumption of raw material = Rs. 41,000
Cost of production = Rs. 96,000
Cost of goods sold = Rs. 1,20,000
Average stock of raw material = Rs. 6,000
Average debtors = Rs. 24,000
Average creditors = Rs. 7,000
Average WIP = Rs. 1,500
Average finished goods = Rs. 7,500

3. XYZ Ltd., had consulted you to advise them regarding the average amount of Working Capital
which will be required in the first year of its working. Compute Working Capital requirement
adding 10% margin for contingencies.

Average amount backed up for stock

Stock of finished goods = Rs. 2,500
Stock of stores, materials etc. = Rs. 4,000
Average credit sales - 7 weeks = Rs. 2,08,000

Average time lag in payment

Wages --- 4 weeks = Rs. 1,04,000
Stock, materials --- 2 weeks = Rs. 26,000
Rent --- 6 months = Rs. 10,000
Administration expenses --- 1 month = Rs. 48,000

Payment in advance (quarterly) = Rs. 6,000

Set up your calculations for the average amount of Working Capital required.

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4. Hi-tech Ltd., plan to sell 30,000 units next year. The expected cost of goods sold is as follows :
Per unit
Raw materials 100
Manufacturing expenses 30
Selling, Administration and finance expenses 20
Selling price 200
The duration at various stages of the operating cycle is expected to be as follows :
Raw material stage = 2 months
Work-in-progress stage = 1 month
Finished goods stage = ½ month
Debtors stage = 1 month

Assume to monthly sales level of 2,500 units.

(a) Calculate the investments in various current assets.
(b) Estimate the Gross Working Capital requirement if the desired cash balance is 5% of the
gross Working Capital requirements.

5. The management of S. Ltd., has called for statement showing the Working Capital needed to finance
a level of activity of 3,00,000 units of output for the year. The cost structure for the company per
unit is:

Raw material = Rs. 20

Direct Labout = Rs. 5
Overheads = Rs. 15
Total cost =Rs. 40
Profit = Rs. 10
Selling price = Rs. 50

Past trend indicate that raw materials are held in stock, on an average for 2 months, WIP will
approximate to ½ months production. Finished goods remain in warehouse on an average for a
month. Suppliers of materials extend a months credit. 2 months credit is normally allowed to
debtors. A minimum cash balance of Rs. 25,000 is expected to be maintained. The production
pattern is assumed to be even during the year. Prepare a statement of Working Capital
determination.

6. PQR Ltd., proposes to have a production programme of 2,40,000 units during 1999. The estimated
% of different elements of cost to the selling price are as under:

Materials 50%, Labour 25%, Overheads 10%.

Following further particulars are available.

(a) Raw materials are expected to remain in stores for an average period of one month before
issue to production.
(b) Each unit of production will be in process for one month on an average.
(c) Finished goods are to stay in the warehouse awaiting customers for two months.
(d) Credit allowed by suppliers is one month from the date of delivery of materials.
(e) Credit allowed to customers is two months from the date of sale.
(f) Selling price per unit is Rs. 10.
(g) Production and sale follow a consistent pattern.

Prepare an estimate of the Working Capital requirement.

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7. Estimate the Working Capital requirement for VS Ltd., from the following particulars :

Rs. Per unit

Raw materials 16
Direct wages 6
Overheads 12
Total cost 34
Profit 6
Selling price 40
(1) Raw materials are held in stock on an average for one month
(2) Materials are in process on an average, half a month.
(3) Finished goods are in stock on an average for one month.
(4) Credit allowed by suppliers is one month.
(5) Credit allowed to debtors is two month.
(6) Lag in payment of wages is 1. ½ weeks.
(7) Lag in payment of overheads is 1 month.
(8) One fourth of finished goods are sold against cash.
(9) Cash on hand and at banks is expected to be Rs. 5,000.
(10) Expected level of production for the year is 1,04,000 units.
Assume that production is carried on evenly throughout the year and wages and overheads accrue
similarly.

8. Prepare an estimate of Working Capital required from the following particulars. Add 10 % to your
computed figure to allow for contingencies.

Figures for the year

(1) Average amount locked up in stocks
Stock of finished goods 20,000
Stores, materials etc. 32,000
(2) Average credit given
Inland sales --- 6 weeks credit 12,48,000
Exports --- 1 ½ weeks credit 3,12,000
(3) Lag in payments
Wages --- 1 ½ weeks 10,40,000
Stores, materials etc. --- 1 ½ months 1,92,000

Rent, royalties etc. --- 6 months 40,000

Clerical staff --- ½ month 2,49,600
Manager’s salary --- ½ month 19,200
Miscellaneous expenses --- 1 ½ months 1,92,000
(4) Payment in advance
Sundry expenses (paid quarterly in advance) 32,000

9. A proforma cost sheet of a company provides the following particulars :

Elements of cost per unit: Rs.
Raw material 100
Direct labour 40
Overheads 60
Total cost 200
Profit 30
Selling price 230
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 The following further particulars are available :

(i) Raw material in stock on an average --- one month.

(ii) Materials are in process on an average --- one month.
(iii) Finished goods on an average ---- one month.
(iv) Credit allowed by suppliers ---- one month.
(v) Credit allowed to debtors ---- two months.
(vi) Lag in payment of wages ---- 2 weeks.
(vii) Lag in payment of overheads ---- one month.
(viii) Half of the output is sold against cash.

You are required to prepare a statement showing the working capital needed to finance a level of
activity 1,04,000 units of production. Assume that a year consists of 52 weeks.

10. A proforma cost sheet of a company provides the following particulars :

Element of cost Amount per unit

Raw materials 40
Direct labour 15
Overheads 30
Total cost 85
Profit 15
Selling price 100

(a) Raw materials in stock on an average --- one month.

(b) Materials in process on an average --- one month.
(c) Finished goods in stock on an average --- one month.
(d) Credit allowed by suppliers --- one month.
(e) Credit allowed to debtors --- two months.
(f) Lag in payment of wages --- two weeks.
(g) Lag in payment of overheads --- one month.
(h) One fourth of the output is sold against cash.
(i) Cash in hand and at bank expected to be Rs. 20,000.

You may assume that production is carried on evenly throughout the year and wages and overhead
expenses accrue similarly.

Prepare a statement showing the net working capital required for the company assuming that a year
consists of 52 weeks and a month consists of 4 weeks.
The level of activity for which working capital is needed is 52,000 units of production.

11. The management of G Ltd., has called for a statement showing the working capital needed to finance
a level of activity of 3,00,000 units of output for the year. The cost structure for the company’s
product, for the above mentioned activity level is detailed below :
Cost per unit
Raw material 20
Direct Labour 5
Overheads 15
Total cost 40
Profit 10
Selling price 50

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 Past trends indicate that raw materials are held in stock on an average for two months.
Work-in-progress will approximate to half months production. Finished goods remain in warehouse,
on an average for a month. Suppliers of materials extend a month credit.
Two months credit is normally allowed to debtors. A minimum cash balance of Rs. 25,000 is
expected to be maintained. The production pattern is assumed to be even during the year. Prepare a
statement of working capital determination.

12. Western company is about to commence new business and finance has been provided in respect of
fixed assets. They have however asked you to advise the additional amount which they should make
available for working capital.
Avg. period Estimate for
Of credit the first year

Purchase of materials 6 weeks 26,00,000

Wages 1.5 weeks 19,50,000
Directors and manager’s salaries 1 month 3,60,000
Travellers and office salaries 2 weeks 4,55,000
Travellers’s commission 3 months 2,00,000
Other overheads 2 months 6,00,000
Sales --- Cash 1,40,000
Credit 7 weeks 65,00,000
Average amount of stock and WIP 3,00,000

Sales are made at an even rate for the year. You are required to prepare from the above figures an
information for submission to your client giving an estimate of the average amount of working
capital which they should provide.

13. You are required to prepare, for the Board of Directors of Excel Ltd., a statement showing the
working capital needed to finance a level of activity of 52,000 units of output per annum. You are
given the following information :
Amount per unit
Raw materials 8
Direct labour 2
Overheads 6
Total cost 16
Profit 4
Selling price 20

Raw material are in stock, on an average, for one month, materials are in process, on average, for
half a month. Finished goods are in stock, on average, for six weeks. Credit allowed to debtors is
two months. Lag in payment of wages is 1 ½ weeks. Cash on hand and at bank is expected to be Rs.
7,300.

You are informed that production is carried on evenly during the year and wages and overheads
accrue similarly.

14. The following data regarding ABC Ltd., is given below. You are required to compute the Working
Capital for the next year after adding 10 % to your computed figure towards contingencies.
Stock of Finished Goods = Rs. 12,500
Stock of Stores and Raw Material = Rs. 20,000
Average credit for domestic sales is 6 weeks = Rs. 7,50,000
Average credit for export sales is 4 weeks = Rs. 2,00,000
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 Average time lag in payments
Wages 4 weeks = Rs. 4,25,000
Stock 6 weeks = Rs. 1,25,000
Rent 3 months = Rs. 25,000
Clerical staff 4 weeks = Rs. 50,000
Executive salaries 4 weeks = Rs. 25,000
Miscellaneous expenses 6 weeks = Rs. 1,40,000
Payment in advance
Sundry expenses paid quarterly = Rs. 22,000

Find the average working capital required.

15. From the following information, prepare a statement showing the working capital requirement.
Budget sales (Rs. 10 per unit) Rs. 2,60,000 per annum.
Analyze of one rupee of sales.
Raw material 0.30
Direct Labour 0.40
Overheads 0.20
Total cost 0.90
Profit 0.10
Sales 1.00
It is estimated that :
1. Raw material in stock for 3 weeks and finished goods for two weeks.
2. Factory processing will take 3 weeks.
3. Suppliers will give 5 weeks credit.
4. Customers will require 8 weeks credit.
It is assumed that production and overheads accrue evenly throughout the year.

16. The cost sheet of a company is as follows :

Elements of Cost Amount per unit
Raw Material 50
Direct Labour 30
Overheads 60
Total Cost 160
Selling Price 200
The following particulars are available.
(i) Raw Material is stock = 2 months
(ii) Work in Process = 15 days
(iii) Finished Goods = 2 months
(iv) Cash Sales = 50,000 units
(v) Creditors = 45 days
(vi) Debtors = 2 months
(vii) Cash at Bank = Rs. 40,000
(viii) Cash in Hand = Rs. 50,000.
Calculate the Working Capital required for the annual production of 1,00,000 units.