@ RAJAT ARORA SIR

Chapter- 5 Business Arithmetic

Q 1. Ramu is buying and selling ice-cream. Explain his working capital requirements.

Q 2. A beauty parlour had varying number of customers during 5 weeks. This information and
the total weekly billing are in the following table. What are the unit of sale' and the 'unit price'
in this case?
If the cost of goods sold or variable cost is 60% of the sale price, calculate the 'unit cost' and
the 'gross margin' per unit of sales.

Weeks Number of Total Amount Average Amount

Customers Billed (₹) Billed (₹) per
Customers
Week 1 10 1,000 100
Week 2 17 1,445 85
Week 3 13 923 71
Week 4 22 5,082 231
Week 5 18 3,150 175
Total 80 11,600 _____

Q 3. Explain the concept of 'Break-even point' with the help of an example.

Q 4. A book shop sells pens 30,000 quantity per year. Demand is uniform. Purchase cost is ₹ 6
per pen. Holding cost per annum is 20% of purchase cost. Ordering cost is ₹ 500 per order.
What should be the EOQ for the shopkeeper?
Q 5. Pankaj an entrepreneur started a new website ‘SAVO ELECTRICITY’ to sell LED bulbs. In
the first year he sold 2,400 bulbs at the rate of 100 each. His cost of placing an order and
receiving the bulbs is₹ 500 per order. If the economic order quantity is 200 bulbs, find out the
inventory holding cost per year.
Q 6. The annual quantity of Jackets sold by Meghana Wool Mart is 12,000 at the rate of
₹ 1,000 / per jacket.
The cost of placing an order and receiving goods is ₹ 500/per order. Inventory holding cost is
₹ 300/per annum. What is the economic order quantity for Meghana Wool Mart?
Q 7. Bigul Chaturvedi started a school bag business with his brother. Both were very excited
about the new venture. With meticulous planning and a lot of hard work they were able to sell
1,000 bags in the first year. But they did not earn any profit.
Both were happy because they were not at loss and revenue generated was equal to the cost.
Now they were moving towards earning profit in the second year.
(i) Identify the component of financial plan discussed above.
(ii) By giving any four points state how this component is useful for the entrepreneur.

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
Q 8. Calculate working capital of Raja and Co who has the following items in its balance
sheet.
Stock ₹ 50,000; trade creditors ₹ 32,000; debtors ₹ 75,000; cash ₹ 1,00,000; dividend payable
₹ 50,000; tax ₹ 44,000; short-term loan ₹ 61,000; short-term investments ₹ 76,000. Calculate
gross and net working capital.

Q 9. Give the meaning of ‘cash conversion cycle’. How does the nature of business influence
its cash conversion cycle? Explain with the help of a diagram.

Q 10. Janata Foods Ltd.’ is a restaurant situated on a national highway near Hyderabad. The
following figures have been extracted from the books of Janata Foods Ltd.

Particulars Amount (₹)

Srock of Raw Material 1,50,000
Short-term Loans 1,83,000
Trade Creditors 96,000
Trade Debtors 2,25,000
Dividend Payable 1,50,000
Tax Payable 1,32,000
Short-term Investments 2,28,000
From the above information, calculate the following
(i) Gross working capital
(ii) Net working capital

Q 11. Aditya Bearings Ltd. are the manufacturers and suppliers of ball bearings to fan
manufacturing companies. The company requires 900 kg of wrought iron for its production
process. The cost of placing each order is ₹ 50 and carrying cost is ₹100. Calculate economic
order quantity.

Q 12. The shop’, a readymade garments retail shop, sold 5,000 shirts at ₹ 200 per shirt during
the year ended 31st March 2014. Cost of placing an order and receiving goods is ₹ 1,000 per
order. Inventory holding cost is ₹ 250 per year. Calculate the ‘Economic order quantity’ for ‘the
shop’.

Q 13. Calculate the Return on Equity (RoE) for Malti International Limited manufacturing pre
mix for instant shakes and smoothies from the details given below
(i) Investments ₹ 10,00,000
(ii) Borrowed funds ₹ 6,00,000
(iii) Interest rate per annum is 10%
(iv) Monthly sales revenue is ₹ 6,00,000 and cost of goods sold is ₹3,00,000.
(v) Fixed expenses per month ₹ 2,00,000 (salary ₹1,50,000, rent and utility ₹ 50,000)
(vi) Depreciation ₹10,000
(vii) Tax @ 20%

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
If Malti International Limited wishes to know how their own money is being used, which
parameter for performance evaluation, RoE or RoI, should be used?

Q 14. A manufacturing plant produces four different types of machinery tools and their
variable costs and price are given below. The fixed costs are allocated - taking into
consideration the utilisation of common resources for different products and they are also
given separately for each product.
Here, is the basic data
Producers A, B, C and D
Selling Price ₹ 1,00,000; ₹ 50,000; ₹ 70,000 and ₹ 2,00,000 respectively.
Variables Cost ₹ 30,000; ₹ 25,000; ₹ 30,000 and ₹ 1,00,000 respectively.
Allocated fixed expenses per month
₹ 3,50,000; ₹ 2,50,000; ₹ 10,00,000 and ₹ 15,00,000 respectively. Compute break-even level
for each of the product.

Q 15. A hotel had varying number of guests during five weeks. The information regarding the
number of guests and the average weekly billing is presented in the following table
Week No. of Guests Average Billed (₹)
1 240 300
2 120 410
3 140 292
4 160 442
5 180 480

(i) What is the ‘Unit of sale’ and;’Unit price’ in this case?

(ii) If the cost of goods sold or variable cost is 60% of the sales price, calculate the
‘Unit cost’ and the ‘Gross profit’.

Q 16. ‘Good Wash Limited’ are the manufacturers of different sizes of fully automatic washing
machines marked as ‘small’, ‘medium’, ‘large’ and industrial’. From the information given below,
calculate the ‘break-even quantity’ of the machines manufactured per month.
Machine Unit Selling Unit Variable Cost Fixed Expenditure
Price (₹) (₹) per Month (₹)
Small 10,000 3,000 35,000
Medium 15,000 8,000 35,000
Large 20,000 13,000 70,000
Industrial 35,000 20,000 1,50,000

Q 17. Illustrate how an entrepreneur assesses the Working taking into consideration the
operating cycle?

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
ANSWER KEY

Ans 1. Ramu is engaged in a trading business. Working capital requirement of a trading

business is less as compared to a manufacturing business because of a shorter cash
conversion cycle. So, his working capital needs will comprise of
(i) Cash for purchasing ice-creams.
(ii) Cash for payment of various operating expenses and meeting short-term
liabilities, ex-payment to creditors for credit purchase of ice-creams, etc.

Ans 2. Unit of sale in this case is ‘customer’.

Totol Billed Amount
Unit Price = Number of Customers
11,600
= = ₹ 145
80

Unit Cost = 60% of Unit Price = 60% of 145

= ₹ 87
Gross Margin Per Unit of Sale = Unit Price – Unit Cost
= 145 – 87
= ₹ 58
Ans 3. ‘Break-even point’ is the point of production at which total sales equals total
cost. It is the condition of ‘no profit, no loss’ for an enterprise.
Suppose, a shirt manufacturer sells 100 shirts for ₹50,000 and his total cost also
amounts to ₹ 50,000, then the production of 100 shirts is his break-even point.

Ans 4. Here, D = ₹ 30,000; P = ₹ 500 and

C = 1.2 (20% of 6). So, 2 x P X D = 3,00,00,000.
This divided by 1.2 = 2,50,00,000.
Square root of which is 5,000. So, the EOQ is 5,000 pens.

Ans 5. Given, Annual Requirement of Inventory or

Annual Sales in units (A) = 2,400 bulbs
Cost of Placing Order (P) = ₹ 500 and
Economic Order Quantity (EOQ) = 200 bulbs
2AP
We know that, EOQ = √ ,
C
where C is the inventory holding cost per unit,
So, on substituting the variables, we get
2 x 2,400 x 500
200 = √ C
On squaring both the sides, we get
24,00,000
40,000 = C

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
24,00,000
C= = ₹ 60
40,000
So inventory holding cost per year = Inventory
Cost per Unit x Average Inventory
200
= 60 x = 60 x 100
2
= ₹ 6,000
Note Average Inventory = EOQ /2

Ans 6. Here, D = 12,000; P = ₹ 500 and C = ₹ 300

2PD 2x 500 x 12,000
Now, EOQ = √ =√ ,
C 300

1,20,00,000
=√ ,
300
= 200 Jackets

Ans 7. (i) The component of financial plan discussed above is ‘Break-even point’.
The break-even point is that level of volume of production at which firm neither makes a
profit nor a loss. Here, the total revenue is equal to the total cost of a firm at a given level
of capacity.
(ii) Calculation of Break-even Point (BEP) is quite useful for the entrepreneur as it helps
in assessing
(a) The minimum level of output to be produced.
(b) The effect of change in quantity of output upon the profits.
(c) The selling price of the product.
(d) The profitable options of the line of production.

Ans 8. Gross working Capital

= Sum Total of all Current Assets
= Stock + Debtors + Cash + Short-term Investments
= 50,000 + 75,000 + 1,00,000 + 76,000
= ₹ 3,01,000
Net working Capital = Total Current Assets – Total Current Liabilities
= (Stock + Debtors + Cash + Short-term Investments) – (Trade
Creditors + Dividend Payable + Tax + Short-term Loan)
= (50,000 +75,000 + 1,00,000 + 76,000)
-(32,000 + 50,000 + 44,000 + 61,000)
= 3,01,000 – 1,87,000 = ₹ 1,14,000

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
Ans 9. The amount of time (measured in days) it takes for a business to convert its
investments in inventory and other resources into cash flows from sales is known as the
Cash Conversion Cycle (CCC).
The cash conversion cycle is the length of time between a firm’s purchase of inventory
and the receipt of cash from accounts receivables. CCC represents the number of days
a firm’s cash remains tied up in the operations of the business.
Different products will have different operating cycles. “Longer the operating cycle,
requirement of working capital will be more, while shorter the cycle, less working capital
is needed.”
For instance, the operating cycles of a trading concern and a manufacturing concern
are explained below.
(i) In a Trading Concern (Explains)
(ii) In a Manufacturing Company (Explains)

Ans 10. (i) Gross Working Capital

= Sum Total of All Current Assets
= Stock of Raw Material + Trade Debtors + Short-term Investments
= 1,50,000 + 2,25,000 + 2,28,000 = ₹ 6,03,000
(ii) Net Working Capital = Current Assets – Current Liabilities
where,
Current Assets = Stock of Raw Material + Trade Debtors + Short-term
Investments
= 1,50,000 + 2,25,000 + 2,28,000
= ₹ 6,03,000
Current Liabilities = Short- term Loans + Trade Creditors + Dividend Payable + Tax
Payable
= 1,83,000 + 96,000 + 1,50,000 + 1,32,000
= ₹ 5,61,000
Net working Capital = 6,03,000 – 5,61,000
= ₹ 42,000
2AP
Ans 11. Economic Order Quantity (EOQ) = √ , where
C
A = Annual usage = 900 kg
P = Cost of placing order = ₹ 50
C = Carrying cost = ₹ 100
On substituting we get, EOQ
2x 900 x 50
=√ = √900 = 30 kg
100

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
Ans 12. Annual sales (in units) = 5,000 shirts
Cost of placing an order (P) = ₹ 1,000
Inventory holding cost per unit (C) = ₹ 250
2AP
Economic Order Quantity = √ C
Where, A = Annual sales in units
P = Cost of placing an order
C= Carrying cost per unit
On substituting the above variables, we get
2 x 5,000 x 1,000
EOQ = √ 250

=√40,000 = 200 shirts

Ans 13. Calculation of ROE

Particulars Amount (₹)
Sales Revenue for the Year 72,00,000
(6,00,000 x 12)
(-) Cost of Goods Sold (CoGS) for the
Year (3,00,000 x 12) (36,00,000)
36,00,000
Gross Revenue
(-) Fixed Expenses (24,00,000)
Depreciation (10,000) (24,10,000)
Gross Profit 11,90,000
(-) Interest on Borrowed Capital (60,000)
Profit after Interest Before Tax 11,30,000
(-) Tax @ 20% (2,26,000)
Net Earnings after Interest and Tax 9,04,000/
RoE (Net Income / Equity x 100) 4,00,000 x 100 = 226%

RoE of Malti Enterprises is 226%

RoE is a good indicator for performance evaluation.

Ans 14.
Products A (₹) B (₹) C (₹) D (₹)
Unit Selling Price 1,00,000 50,000 70,000 2,00,000
Unit Variable Cost 30,000 25,000 30,000 1,00,000
Contribution per Unit (Unit 70,000 25,000 40,000 1,00,000
Selling price -Unit Variable
Cost)
Fixed Expenses per Month 3,50,000 2,50,000 10,00,000 15,00,000
Download DeeCee App for Class 12, CUET, CA Foundation Courses
Contact Us At 011-40848482
 @ RAJAT ARORA SIR
Fixed Expenses
Break -even Quantity = Contribution Per Unit
So, Break – even Quantity for ‘A’
3,50,000
= = 5 units
70,000
Break-even Quantity for ‘B’
2,50,000
= = 10 units
25,000
Break-even Quantity for ‘C’
10,00,000
= = 25 units
40,000
Break- even Quantity for ‘D’
15,00,000
= = 15 units
1,00,000

Ans 15. (i) The unit of sale is ‘guest’. The unit price will be computed as follows
No. of Guests Average Billed (₹) Total Billed (₹)
240 300 72,000
120 410 49,200
140 292 40,880
160 442 70,720
180 480 86,400
840 3,19,200

Total Billed Amount

Unit Price = Total Guest
3,19,200
= = ₹ 380
840
(ii) Unit Cost = 60% of 380 = ₹ 228
Gross Profit = Unit price – Unit Cost
= 380 – 228 = ₹ 152

Ans 16. Break even Quantity of ‘Small Machine’

Unit selling price = ₹ 10,000
Unit Variable cost = ₹ 3,000
Contribution Per Unit = Unit Selling Price – Unit Variable Cost
= 10,000 – 3,000 = ₹ 7,000
Fixed Expenses = ₹ 35,000
Fixed Expenses
Break- even Quantity = Contribution Per Unit
35,000
= = 5 units of machine
7,000

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
Break – even Quantity of ‘Medium Machine’
Unit selling price = ₹ 15,000
Unit Variable cost = ₹ 8,000
Contribution Per Unit = Unit Selling price – Unit Variable Cost
= 15,000 – 8,000 = ₹ 7,000
Fixed expenses = ₹ 35,000
Fixed Expenses
Break – even Quantity = Contribution Per Unit
35,000
= = 5 units of machine
7,000

Break- even Quantity of ‘Large Machine’

Unit selling Price = ₹ 20,000
Unit variable cost = ₹ 13,000
Contribution Per Unit = Unit Selling Price – Unit Variable Cost
= 20,000 – 13,000 = ₹ 7,000
Fixed expenses = ₹ 70,000
Fixed Expenses
Break – even Quantity = Contribution Per Unit
70,000
= = 10 units of machine
7,000

Break-even Quantity of ‘Industrial Machine’

Unit selling price = ₹ 35,000
Unit variable price = ₹ 20,000
Contribution Per Unit = Unit Selling Price – Unit Variable cost
= 35,000 – 20,000 = ₹ 15,000
Fixed expenses = ₹ 1,50,000
Fixed Expenses
Break- even Quantity = Contribution Per Unit
1,50,000
= 15,000 = 10 units of machine

Ans 17. To assess the working capital requirements of an enterprise taking operating
cycle into consideration, an entrepreneur should know the following
(i) Purchase of Raw Materials and Consumable Stores Fund requirement for
holding raw materials depends upon
(a) Average consumption of raw material.
(b) Fluctuations in raw material consumption.
(c) Fluctuations in raw material availability.
(d) Minimum order size supplied by the vendors.
(e) Storage facilities available.

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482
 @ RAJAT ARORA SIR
(ii) Expenses It is generally a common practice that cash equivalent to one
month’s cash expenses should be kept for meeting contingencies like
fluctuation in material prices, delay in realisation from debtors, etc.
The quantum of such cash retention for meeting working capital
requirements depends upon the process time also. For activities having long
process time like Ship building, higher quantum of cash balance has to be
maintained.

(iii) Work-in-progress The funds locked up in work-in cash progress depends dru
the following factors
(a) Time required for conversion of raw material.
(b) Number of products handled at a time in the process.
(c) The steps in the process.
(d) Value of raw material in semi-finished products.
(e) Value added at each stage.

(iv) Finished Goods Goods may be manufactured against firm orders or against
anticipated orders. In the former case, the quantum of finished goods held
depends on
(a) Delay due to inspection of finished goods especially where an external
agency is involved.
(b) Delay in preparation of despatch documents.
(c) Delay in shipment.

In the latter case, i.e. in case of goods manufactured against anticipated orders, the
quantity of finished goods held depends upon
(a) Average despatch quantity of finished goods.
(b) Minimum and maximum quantity that can be despatched.
So, after the above factors are assessed and analysed, then only the working capital
requirements can be computed.

Download DeeCee App for Class 12, CUET, CA Foundation Courses

Contact Us At 011-40848482